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COPYRIGHT DEPOSIT. 



Copyrighted 1922 

BY 

Benjamin H. Dugdale 



MORTGAGE 
LOAN VALUES 



A Few Comments on Various Matters 
Pertaining to Real Estate Mortgages 



By 



BENJAMIN H. DUGDALE 



*?' 



PREFACE 

Mortgage Loan Values is, as its sub-title states, a 
series of "comments upon various matters pertaining 
to the mortgage loan business. ' ' 

This book is intended for the use of investors in 
Eeal Estate mortgages and of those persons who may 
be called upon to act in an advisory capacity to such 
investors in passing judgment upon the physical, 
moral or legal features of Real Estate securities. 

None such can read it without profit and few, hav- 
ing once read it, will be willing to dispense with it as 
a reference book, for it will often enable them to 
avoid errors which might result in unsatisfactory 
experiences. 

The treatment of the subject is in no sense technical 
nor theoretical but is simply a few discussions of 
practical questions which are apt to arise in the 
mortgage loan business and is written by one whose 
experience in suclj matter has extended over many 
years and into many different sections of the country. 

The book contains a number of valuable tables and 
sketches, some of which are difficult or impossible to 
find elsewhere and which add much to its practical 
value. 



JAN -8 23 



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The illustration shown on the opposite page together 
with its translation, for which I am indebted to the 
kindness of S. W. Strauss & Company, represents a 
clay tablet which is said to be the oldest record now 
in existence of a mortgage security although such 
mortgages are said to have been used among the Baby- 
lonians for many years prior to the date of this one. 



MORTGAGE LOAN VALUES 

I 

THE DESIRABILITY OF REAL ESTATE SECURITIES 

During what are known as "good times," when 
everything seems to be working together for pros- 
perity, Capital is inclined to encourage the launching 
of new, and the enlarging of old enterprises. 

The wheels of manufacture grow busy, the paths of 
commerce become crowded, and Capital, being ven- 
turesome when anticipating large profits, is apt to 
overestimate the value of the securities offered and 
to proceed along lines which at other times might be 
considered hazardous. 

Under such conditions, mining, manufacturing, 
transportation, banking and mercantile enterprises all 
apparently flourish, and the securities which they 
offer often sell readily upon the market even when 
a careful analysis would fail to demonstrate their 
stability. 

Capital, however, although sometimes inclined to 
be greedy, is also easily alarmed, and, when losses 
occur, as they are apt to do under very liberal credit 
conditions, it at once develops greater caution, it 
depreciates its own former valuations and demands a 
larger margin of security. Its confidence is so easily 
disturbed that if many losses occur it soon becomes 

9 



10 MORTGAGE LOAN VALUES 

inclined to doubt all securities and even to withhold 
its support from undertakings which really give good 
promise of success, and which, if properly financed, 
might prove to be very profitable. These conditions 
are frequently spoken of as " hard times, ' ' and at such 
times new enterprises are often unable to gain a 
foothold, while old ones halt along the road and some- 
times fall by the wayside. Thus the financial credit 
pendulum swings a little too far on either side of the 
perpendicular of sound business sense, which indeed 
it is compelled to do, for its use and safety depend to 
a great extent upon its compliance with the spirit of 
the times. 

A condition of financial uncertainty and depression 
naturally brings about a period of liquidation and a 
readjustment of values, and causes inquiry to turn to 
the least easily affected securities. It is at such times 
that we most often hear it said that Real Estate Mort- 
gages afford the best security obtainable, for nothing 
else seems to stand upon so solid a foundation, inas- 
much as Real Estate is less sensitive, except in special 
instances, to adverse financial conditions than are the 
stocks, bonds, and other securities which command as 
good a rate of interest. 

Although such a conclusion may not be true in each 
individual instance, in a general way it is true, and 
is a view of the matter which appeals very strongly 
to those who have charge of trust funds, whether of 
the many millions held by the great Insurance and 
Trust Companies, or the few hundreds guarded by 
the individual for the future use of his family or for 
his own old age, for upon such persons rests not only 



MORTGAGE LOAN VALUES 11 

the principal obligation of safe investment, bnt also 
the necessity for such investments as will retnrn a 
fair rate of interest, and which, once placed, may 
remain undisturbed for a reasonably long time. 

The practice of pledging property to secnre the 
payment of debts is ancient and universal, and by 
virtue of law and custom it extends, at least indirectly, 
to almost all credit transactions. 

If the person borrowing money or otherwise con- 
tracting a debt is possessed of a sufficient amount of 
property, the debt, in the ordinary course of business, 
is considered to be well enough secured, even if there 
is no definite pledge of specified property, provided, 
of course, that its payment may be called for within 
a limited time, but, when the maturity of the debt is 
postponed for a considerable length of time, such for 
instance as for a term of years, the simple fact that 
the present property holdings of the debtor or his 
indorsers are sufficient, adds but little strength to the 
security, especially if their holdings are of such a 
character that they can be easily or quickly dissipated 
or transferred to others without the consent of the 
creditor. 

The direct Real Estate mortgage overcomes this 
objection, and the use of this form of security is also 
an ancient one. (More than a thousand years ago 
Sighelm, an Anglo-Saxon warrior, pledged his lands 
at Cooling to Goda to secure the payment of thirty 
pounds which he had borrowed, and his daughter, 
who inherited the lands, had to repay the loan in 
order to ' ' cleanse ' ' them of the debt, although she was 
then the Queen of England.) It is true that Real 



12 MORTGAGE LOAN VALUES 

Estate value often enters, either directly or indirectly, 
into the security offered by stocks, bonds and munici- 
pal securities, and that it sometimes constitutes a large 
part of such security, but in this form it is too far 
removed from any control by the investor to be prop- 
erly classed as Real Estate security, and it is not often 
held in as high esteem by those whose main object is 
the safety of their investments as is the direct Real 
Estate mortgage, which, while not so liquid in its 
character, nevertheless affords a right of recovery 
from property that, to them at least, is of a more 
tangible form and value. 

There is, however, a necessary slowness about al] 
Real Estate transactions which must be taken into 
account. Almost all agreements concerning it must 
be in writing and many of these are required to be 
made matters of public record; if it is taken as 
security, a careful and unhurried examination of the 
physical features and of the title to the property is 
also necessary, for no- general investigation can be de- 
pended upon to determine the value and ownership 
of any individual holding as may be done in the case 
of stocks or bonds, nor can any specific investigation 
for one transaction in Real Estate be made to cover 
fully the requirements for subsequent transactions; 
and if the payment of a debt secured by mortgage is 
defaulted, foreclosure and recovery is in many States 
rather a slow process, and if it is bidden in by the 
mortgagee still further delay is apt to accompany the 
conversion of the property into cash. 

For these reasons Real Estate securities while 
among the safest to be had are not so satisfactory to 



MORTGAGE LOAN VALUES 13 

those investors whose needs may at any time require a 
quick realization upon their assets. 

Such things, however, do not necessarily affect the 
soundness of mortgage securities; on the other hand, 
they supply reasons for a somewhat higher rate of 
interest, accompanied by a maximum of safety, being 
obtainable, and in contrasting them with the more 
liquid securities, the rule does not apply that a higher 
rate of interest inversely indicates the value of the 
security, although in its other applications, that is, in 
comparing the individual securities of either class 
with others of the same class, the rule is undoubtedly 
a sound one. 



II 



THE MORTGAGE LOAN BUSINESS 

Taking the country as a whole, the mortgage loan 
business is one of vast proportions and importance; 
it has followed wherever Eeal Estate has gained a 
market value, and its importance has gone beyond the 
benefits accruing to those immediately concerned and 
far into the field of general business and general de- 
velopment. The great bull?: of the money so invested 
is made up of trust funds which are composed princi- 
pally of the savings of a vast number of persons of 
limited individual earning capacities, and these funds 
are entrusted to the care of the many Insurance Com- 
panies, Trust Companies and Savings Banks. 

Under this plan, not only is no account too small to 
yield its proportionate earnings to its owner but, as 
the company or bank to which the money is intrusted 
usually makes either large loans or a large number of 
loans, it is in a better position to give borrowers at- 
tractive rates and terms than is the small investor, 
principally because its overhead charges upon a per- 
centage basis are proportionately smaller. 

If it makes a large number of loans it is also en- 
abled to grant more liberal prepayment privileges to 
borrowers and yet suffer less proportionate loss of 
interest by reason of loan funds lying idle than would 
probably be suffered if the investments were few in 

14 



MORTGAGE LOAN VALUES 15 

number, and with this advantage it is able to attract 
the better class of borrowers whose securities entitle 
them to the best terms which the market allows. 

If the business is in any sense an extensive one, 
however, either in the amount loaned or the number 
of loans made or in the territory covered, its success 
absolutely depends upon its being conducted along 
very conservative lines. On the other hand, the in- 
vestor who makes only a limited number of loans and 
makes these in a territory with which he is familiar, 
to persons whom he knows personally, and upon prop- 
erty with the value and merits of which he is well 
acquainted, will frequently accept securities which 
would not pass the scrutiny of any expert in this line, 
and, although he may even ignore important rules of 
procedure in making them, he is usually able to avoid 
any ultimate loss. Being upon the ground he is able 
to keep in close personal touch with his investments 
and protect them if necessary; he is therefore in less 
proportional danger of suffering loss than he could 
possibly be in his average investment if his operations 
were extensive, or if, for any other reason, the inti- 
mate personal conditions did not exist. 

It is not the purpose of these comments, however, 
to point out how far, or upon what occasions, it may 
be safe to vary from the beaten lines followed by the 
more careful class of lenders, but rather, simply to call 
attention to the main principles underlying mortgage 
loan values, and to some of the conditions affecting 
those values which are most apt to be encountered in 
the ordinary course of a mortgage loan business. 

If it is desired that a high degree of safety shall 



16 MORTGAGE LOAN VALUES 

be combined with reasonable earnings, it is important 
that the rules affecting such securities should be 
clearly understood and intelligently applied. 

To do this successfully requires a good working 
knowledge of the whole subject, unless indeed the 
transactions are confined within very narrow limits, 
for, while a number of mortgage loan rules are general 
in their character and apply to all such loans, the im- 
portance and applicability of other rules vary as the 
general class of property or the surrounding circum- 
stances may differ. 

While no theoretical knowledge of this subject can 
be said to be dependable, except as interpreted by the 
light of a practical knowledge, it is believed that such 
a discussion may be interesting and possibly of use, 
not only to those who are engaged in lending upon or 
investing in Real Estate securities and to whom these 
comments are especially addressed, but also to those 
whose interest in the matter is a less direct one. 

In this discussion many very simple and apparently 
obvious matters will be mentioned, the apology being 
that just such simple and obvious matters are often 
overlooked by those whose training in the business 
has not been such as to compel their consideration of 
each and every fact affecting the questions at issue. 

It may also be mentioned that, notwithstanding any 
rules which may be cited, in no part of the mortgage 
loan business is the personal equation of minor im- 
portance, and practical "common sense" must inter- 
pret every rule in its application to any question to 
be decided, nor are these comments to be regarded as 
being in the nature of a text book on mortgage loans 



MORTGAGE LOAN VALUES 17 

but rather merely as a series of suggestions upon 
various features of the subject and warnings of cer- 
tain dangers which may be encountered. 

In order that there may be no misunderstanding nor 
confusion of the terms used herein it may be said that 
the term "investor" has been chiefly used to designate 
the person or company who procures securities 
from whatever source, purely for investment, and 
that the term "lender" has been used to designate the 
person or company always dealing directly with the 
borrower, and generally with the object of selling the 
loans to the investor. 

Certain erroneous ideas of loan values are held by 
many persons, and if any such are entertained by the 
prospective investor or lender it is quite important 
that he should disabuse his mind of them before he 
undertakes to deal in such securities. 

Some of these ideas seem absurd to those who have a 
knowledge of the subject, but to the uninformed their 
absurdity is not alwaj^s apparent; for instance, it is 
supposed by some persons that a Real Estate mort- 
gage is per se a good investment; this is not true, 
however, for the property value may be inadequate or 
unstable, the title may be defective, the net income 
may be insufficient, the personal hazard may be un- 
satisfactory, the time of maturity may be too long 
deferred or of too short duration, the location may 
be too remote from markets or other conveniences, or 
it may have any one or more of many other defects. 

It is thought by some that an expert can determine 
the exact value of real property, but this cannot be 
done because of the fact that too much of the unknown 




18 MORTGAGE LOAN VALUES 

enters into each proposition to enable any expert to 
' ' split dollars ' ' in his valuations, and lie can only give 
approximate estimates. 

It is also believed that because the interest of the 
borrower and the lender differ, they are antagonistic 
— that the average borrower is the unfortunate victim 
of circumstances and the average lender ever watchful 
of opportunities to oppress and overcharge him. 
Nothing could be further from the facts, for almost 
every borrower has or believes he has a more profit- 
able use for the money than its rental cost to him, and 
almost every lender is willing to grant as easy and 
favorable terms as are consistent with the proper pro- 
tection of his legitimate interests. 

Nor is the belief uncommon that a greater volume of 
business may be obtained by the lender in hard times 
than in good times; but this is not the fact for in 
hard times the people are more economical in their 
expenditures and more conservative in their invest- 
ments and there are fewer apparently profitable uses 
for money, but it may be remarked in passing that in 
hard times the lender's interests are more often safe- 
guarded by the fact that there is then less danger 
from high property valuations or the unwise use by 
the borrower of the proceeds of the loan. 

Another mistake which the investor should- avoid 
is the provincial error of supposing conditions to be 
necessarily inferior ones because they differ from 
those that are found in the territory with which he 
is familiar. It is sometimes hard, for instance, for 
the person whose knowledge is confined to the wheat 
belt to realize that just as dependable values may 



MORTGAGE LOAN VALUES 19 

exist in the cotton belt and vice versa, or for one who 
has always lived in a section where there is a satisfac- 
tory rainfall to believe that irrigation has passed 
beyond the experimental stage. 

Yet another common error is the belief that there 
are large sections where all of the land is practically 
"worn out," and he who lives in the newer parts of 
the North or West often so regards the older lands of 
the South and East. He looks askance even at the 
' ' red pebble ' ' lands of Georgia, and regards nearly all 
of the balance as being practically worthless, although 
with proper care and management many parts of it 
may be made to produce as much net revenue as may 
the black loam of Iowa or the ' ' black waxy ' ' lands of 
Texas. 




THE COTTON COUNTRY 



20 



Ill 

BASIS OF MORTGAGE LOAN VALUES 

Although subject to some exceptions, which will 
be referred to later, it is a general rule that loan val- 
ues, (aside from questions of title and personal haz- 
ard) are based upon market and income values, and 
that these are based upon certain facts of which it is 
important that the investor or lender should have a 
general idea in order that he may have a clearer 
understanding of the main causes which promote the 
growth of such values or which, on the other hand, 
may tend to diminish or destroy them, for the only 
safe way of determining the soundness of any proposi- 
tion is by examining the foundation upon which it 
rests. 

Briefly stated, the physical foundation of mortgage 
loan values is made up of the two principal factors of 
population and fertility of soil, united by the third 
factor of transportation. 

The first two are essentially the basis of all values, 
for population cannot exist without fertility of soil, 
nor can any value attach to fertility of soil without 
population, but in order that such values may main- 
tain any degree of stability these two principal factors 
must be fairly well balanced ; that is, both must exist 
where each is available to the other at a cost which 
is not too burdensome, and here the factor of trans- 
portation enters and furnishes the means to that end. 

21 



22 MORTGAGE LOAN VALUES 

Nor is this factor of less importance, so far as ex- 
change or loan values are concerned, than are the 
others, for it is also an essential factor in the estab- 
lishment and maintenance of such values. 

Neither is the term "transportation facilities" as 
used in this discussion intended to be confined to the 
ordinary means of moving products by railway or 
boat lines, but is intended to extend to country roads 
and city streets and all of the various public facilities 
which may exist for the transportation of persons or 
commodities and the lack of which causes otherwise 
desirable city and suburban locations and fertile lands 
to remain unimproved and unproductive. 

Notwithstanding the fact that a section of country 
is new and undeveloped and its population sparse, if 
it is not barren its land may be said to have an income 
value, inasmuch as its products furnish food and cloth- 
ing and shelter for its inhabitants ; such supplies may 
be poorer and coarser in quality, and more meager in 
quantity and variety than they may afterwards 
become under more populous and advanced conditions, 
but, as they supply the needs of the inhabitants and 
require a certain amount of manual labor to secure 
them, the facts are much the same in either case, the 
difference being more one of degree than of kind. 

Such an income value as this does not necessarily 
carry with it at first any rental or sale value which 
the possessor of the land might obtain by transfer- 
ring its uses and profits to another, for under the con- 
ditions of a sparse population and abundant land, 
each may easily obtain for himself at either no cost or 
at a trifling one, such land as he may be able to use. 



MORTGAGE LOAN VALUES 23 

The development and appreciation in value of agri- 
cultural lands, and the growth of villages into towns, 
or of towns into cities, are due to many causes of 
which the increase in the local population is the pri- 
mary one. 

As the population increases conditions change; the 
natural resources of the section become better de- 
veloped, the lands most suitable for agricultural pur- 
poses are taken up and divided under separate owner- 
ships, roads are opened, and lines of communication 
and traffic with other sections are established, and, 
when persons come into that locality who wish to use 
or own lands that are held by others, Real Estate 
shows the beginning of a rental and a sale value. 

As this development progresses and' the population 
still further increases, churches, schools, and centers 
for trade and government are established, all of which 
encourage still further growth, and the former uncer- 
tain salability of Real Estate becomes more certain 
and crystallizes into market value. 

With a few exceptions (notably that of Gary, In- 
diana) towns and cities have had small beginnings, but 
the sites originally selected for their location were 
usually so chosen for one or more of the various 
causes which go to promote urban growth, and, in 
some instances, these have really proved to be suffi- 
cient to that end, although in most cases they have 
been found to be wholly inadequate in themselves to 
any very large growth either in population or indus- 
tries. 

Under the primitive conditions of an early civiliza- 
tion, situations adjacent to hunting grounds and 



24 MORTGAGE LOAN VALUES 

places which, afforded a good supply of water, timber, 
or pasturage were often favored, and under conditions 
where local warfare, robber bands, or hostile savages 
were a constant threat to the inhabitants, locations 
suitable to defense were chosen; the origin of many 
important cities may be traced to these primitive 
causes. 

In later times, portages, the crossings of established 
lines of travel, water power for milling or manufactur- 
ing purposes, proximity to valuable mineral deposits 
or to large bodies of timber, convenient seats for local 
government, or centers for local trade, have all been 
common causes for the location of towns, some of 
which have afterward acquired considerable import- 
ance, although in a majority of instances they have 
shown very marked limitations. 

While this has been generally true, other and at 
first unforeseen conditions have sometimes developed 
and have been so favorable to urban growth that the 
original village has afterward attained considerable 
importance as a town or city. It is said, for instance, 
that the two most potent reasons for the selection of 
the site of the present Capital of Indiana were the 
possibilities of a steamboat landing on White River 
and the water power afforded by Fall Creek neither 
of which afterwards proved to be of any practical 
value. 

When a certain stage of development has been 
reached, mortgage loan values come into existence and 
they will always be found to have developed in accord- 
ance with the character and stability of the foundation 
upon which the market values have been built. If 



MORTGAGE LOAN VALUES 25 

these values have been based upon well balanced con- 
ditions the loan values are almost sure to be satisfac- 
tory; if upon unsupported promises of future devel- 
opment or illy balanced conditions, they are in the ag- 
gregate as certain to be unsatisfactory. 

When a town is established, and the land which is 
used for that purpose is divided into lots, some or -all 
of which are sold to separate owners, any loan value 
which the land may previously have had as agricul- 
tural land is at once almost or quite destroyed, and 
any loan value which may afterward attach to it must 
be calculated upon a different set of facts, for the 
more direct and active factor in its basis of value will 
then be its population and its suitability to the needs 
of that population instead of the fertility of its soil, 
as was the case when it was agricultural land. 

In the case of the larger towns and cities it is also 
almost invariably true that although as a whole they 
may have the elements of growth, and even of large 
growth, certain portions of them will lack attractive- 
ness. Sometimes this is for no very obvious reason 
although true to a degree which depresses the Real 
Estate market of that section, and it is also frequently 
true that when Real Estate promotions are under- 
taken, towns or portions of towns are built up and 
improved beyond what is warranted by any support 
which they can safely hope to command. 

These facts should be kept in mind, for, although a 
certain degree of development is always necessary 
before any loan values can be said to be established, if 
such development or growth is one of the past but is 
one which has become stagnated, or if, on the other 



26 MORTGAGE LOAN VALUES 

hand, it is a recent one bnt has passed beyond that 
stage which is justified by the conditions npon which 
a stable market value can be based, the loan value in 
either case is always weakened and, in some instances, 
it may even be destroyed. 



IV 

CLASSIFICATION OF REAL ESTATE SECURITIES 

Preliminary to an intelligent discussion of the sub- 
ject it is important first to recognize the fact that 
mortgage investments are naturally separated into two 
general classes which are known to those who are 
engaged in the business as "farm" loans and "city" 
loans. 

These two classes of Real Estate securities differ 
from one another in many important respects and, 
while many of the rules of the loan business apply 
equally to either class, the differences are so many 
and so marked as to fully justify their separate 
classification. 

These differences are due to the fact that although 
all Real Estate loan values are based upon the dual 
foundation of population and fertility of soil, the 
more direct and immediate cause of the inception and 
growth of city loan values lies in population, and that 
of farm loan values in the fertility and products of 
the soil. 

In the actual work of making loans it becomes ap- 
parent at the very outset that this difference is not 
a superficial one ; in one case the borrower must show 
a set of facts in his application different from those 
which are required to be shown in the other; and 
throughout all subsequent transactions both in the 

27 



28 MORTGAGE LOAN VALUES 

making and during the life of the loan, certain dif- 
ferences must be understood and taken into account. 

There is also a large amount of Real Estate which 
does not rightly belong in either of the above classes 
and will not be discussed here for the reason that it has 
no definite loan value except, indeed, a very limited 
local one. Such property consists of the various kinds 
of improved and unimproved Real Estate located in 
the country or in small towns and villages or upon 
the outskirts of larger towns, where there is an insuf- 
ficient acreage to give it any farm loan value and 
insufficient urban development to give it any city loan 
value. 

This list also includes arid lands and swamp lands 
and all oil. mineral, timber and range lands, when 
the soil and surface are unfit for farming purposes, 
or when they cannot be agriculturally developed 
except at a considerable cost, none of which is 
regarded as acceptable security. 

There is no possible question, however, but that 
very high grade and satisfactory loans may be ob- 
tained from either of the main classes of Real Estate 
securities, but the fact must also be recognized that 
the terms ■"farm" loans and "city" loans are each 
subject to either a liberal or a conservative interpreta- 
tion. 

Thus the more conservative lenders and investors 
confine the meaning of the term "farm" loans to 
loans upon agriculturally improved lands and that of 
' ' city ' ' loans to loans upon standard income property 
well within the limits of cities or fair sized towns; 
while those who are more liberal in their views ex- 



MORTGAGE LOAN VALUES 29 

tend the meaning of both, terms to include less desir- 
able locations, and less fully developed properties and 
also to include many properties in either class, the 
uses of which are confined to special purposes. 

While an arbitrary line is thus drawn in each gen- 
eral class by the conservative investor separating cer- 
tain kinds of Real property as being more desirable 
from other kinds regarded as less desirable, it does 
not follow that all on one side of that line are good 
nor that all on the other side are necessarily bad; 
and it is no doubt true that such a rule excludes many 
offerings both of farm and city loans where the prop- 
erty has, not only a present market value, but where 
it has also a present or potential income value that 
would seem to justify a loan value. 

Such loans are usually refused for the arbitrary 
reason that the class to which they belong is an unde- 
sirable one or because it is believed that the security 
rests too much upon the development or maintenance 
of certain favorable conditions not yet fully estab- 
lished, and that while the security may have both 
the promise and prospect of the needed support, there 
is, nevertheless, an element of uncertainty as to future 
happenings and future values which is not attractive 
to a conservative investor. 

The desirability of such securities grades from the 
very highest down to those offerings which are simply 
impossible, -and the line is generally intended to be 
drawn at a point which will exclude the various kinds 
of property that, as a class, are each liable to certain 
loan faults, although it is not usually intended that 
the rule shall be applied with such rigor as to exclude 



30 MORTGAGE LOAN VALUES 

the individual exception which is not seriously af- 
fected by the faults of its kind. 

One example of this may be seen in the fact that 
timber, orchard, and range lands are usually excluded, 
except by local lenders, as belonging to an objection- 
able class, although in the individual instance it is 
readily admitted that a certain amount of timber, or- 
chard, and permanent pasture may add to the average 
acreage value of a farm rather than detract from it. 
Another example may be found in the fact that a 
city property which is classed as being a special pur- 
pose property, because such is its intended and pres- 
ent use, may have an availability for other purposes 
which will give to that individual offering a perfectly 
legitimate loan value notwithstanding the fact that 
theoretically it belongs in an undesirable class. 

Various kinds of Real property, however, which 
may be fairly listed as "city" property or as "farm" 
property are nevertheless open to objections when 
viewed from a reasonably conservative standpoint; 
this list includes the cheaper class of city properties 
which are too liable to material depreciation and the 
very costly residences which will pay no adequate 
cash return upon the investment and which will sel- 
dom be found to be marketable except at a great 
sacrifice. 

It includes vacant lots and very generally includes 
all such "special purpose" properties as churches, 
schools, halls, hospitals, lodges, theatres, hotels, mills 
and manufacturing plants. 

It includes those lands which in their present state 
or location or uses are only potentially farming lands 



MORTGAGE LOAN VALUES 31 

but which may be reclaimed in time or developed at a 
nominal cost, such, for instance, as those that lack a 
proper equipment in fences and buildings, or those 
that are too remote from markets to have a satisfactory 
net income value or are so poorly located as to have 
no "social" value, or lands which are used for such 
special purposes as orchards, etc., or those which have 
too large a proportion of "bone" or are either too wet 
or too dry for profitable farming but may be easily 
drained or irrigated. 

From a loan point of view none of the above kinds 
of property is very attractive and a strictly conserva- 
tive view excludes them, although a more liberal view 
finds occasional exceptions in individual offerings 
from among them. 

It may be the part of wisdom not to attempt too 
rigid a classification and to recognize exceptions 
when they are well defined, considering each offering 
upon its individual merits, but in doing so there is 
the danger that a door will be opened through which 
doubtful loans may crowd unless it is very wisely 
guarded. 

The strict rule in this matter, however, is no doubt 
the safe one, for the temptation is always great to 
allow the action in one case to establish a precedent 
for other cases where the conditions may not be 
exactly similar, and there is always the chance that 
outside interests, greed or optimism may incline the 
investor to stretch a rule that has come to be regarded 
as being an elastic one. 

Whatever practice is followed in this matter it 
should be remembered that certain kinds of property 



32 MORTGAGE LOAN VALUES 

have not been excluded by conservative investors 
except for sound reasons. It must also be remem- 
bered that in going outside of the regular lines many 
unfavorable facts may escape notice, and that if the 
kinds of property which are not fully acceptable 
under strict rules are arbitrarily rejected it will at 
least leave a safer field for mortgage loan invest- 
ments; and it may be repeated here that those legiti- 
mate and safe Eeal Estate securities concerning 
which there is no element of doubt from a physical 
point of view, will be found to be principally confined 
to two general classes, to-wit, farm loans and city 
loans, as these designations are understood by conser- 
vative lenders. 

The one class embraces only such lands as are either 
wholly or in a large part agriculturally developed and 
of a general productivity that justifies their value, 
and the other only such well located and substantial 
business or residence properties as have a satisfactory 
income value and a satisfactory "balance" of ground 
and improvement values. 




UNATTRACTIVE FARM 



33 



V 

FARM LOANS VS. CITY LOANS 

It is perhaps an open question as to which general 
class of Real Estate securities is the more desirable 
one, for each has some advantages and some disad- 
vantages peculiar to itself, and the proper answer to 
the question probably is that it is that class of which 
the investor has the most intimate knowledge and the 
most complete equipment for its investigation. 

The bad loan is the individual loan of either class. 
It is the one which has been selected without due cau- 
tion or without due knowledge of that branch of the 
loan business to which it belongs ; but both farm loans 
and city loans, when they have been properly selected, 
will prove to be very safe and satisfactory either as 
investments or as salable securities. 

Lenders, or those who procure mortgages for the 
market, very generally operate only in the one class 
for which their territory and their knowledge and 
equipment are best fitted, but investors are very gen- 
erally ready and willing to consider both farm loans 
and city loans, provided that their knowledge and 
equipment are such that they are able to properly 
investigate and handle offerings from each class, 
otherwise they usually confine their investments ex- 
clusively to one or the other. 

The city affords the best field for very large loans ; 
34 



MORTGAGE LOAN VALUES 35 

for instance, a city business or office building repre- 
senting an investment of hundreds of thousands of 
dollars is not unusual, and it is a compact proposition 
that can seldom be duplicated in sala'bility, income or 
ease of management by any farm or ranch of equal 
value, although in smaller loan propositions, which, 
of course, make up the bulk of the business, farms 
show some points of superiority over city properties. 

The average city loan also has certain advantages, 
one of which is that it can be made more expeditiously 
and more cheaply than can the average farm loan, the 
borrower's application is more apt to be filled out in a 
satisfactory manner, and when this is not the case, less 
time is usually required for its correction. It is less 
difficult in the case of city loans to obtain the services 
of disinterested appraisers and of competent abstrac- 
tors and attorneys, and less time is consumed in per- 
fecting faulty record titles and in assembling the per- 
sons necessary to the closing of loans. 

Nor are the location and dimensions of city prop- 
erty often matters of any uncertainty, while it is 
sometimes impossible to determine the lines or the 
exact acreage of a farm until a survey of it has been 
made ; nor is the inspection of city property apt to be 
difficult at any time, while the proper inspection of a 
farm is often delayed by a bad condition of the roads, 
inclement weather, a covering of snow or a very wet 
and muddy condition of the land itself. 

City property also has the advantage of being less 
troublesome for the mortgagee to keep in touch with 
during the life of his loan and more convenient for 
him to handle in event of a foreclosure, its use at a 



36 MORTGAGE LOAN VALUES 

cash rental will be considered by a greater number of 
persons, and if offered for a quick sale it will usually 
command the attention of a larger number of buyers, 
thus insuring a more ready sale and a price which is 
nearer its then true value. 

Interest and principal collections are not usually 
more difficult in one class than in the other, but if 
the payment of the principal is defaulted and the 
property comes into the possession of the mortgagee, 
he often finds himself unable to make the farm yield 
him any profit, for the reason, not always recognized, 
that the successful management of a farm requires 
the constant personal attention of a practical farmer, 
while city property may only require the occasional 
attention of an agent. 

It is also true that the enhancement of the ground 
value, if it should occur in any section, is apt to be 
much greater in a growing city where the population 
is considerable in proportion to the available apace 
in which it can conveniently live and transact its busi- 
ness, and where the land is divided into comparatively 
small portions, than could be the case with any farm 
properties under their conditions of larger areas and 
a sparser population. 

On the other hand, properly made farm loans have 
an advantage in one feature that is of paramount 
importance ; they have a certain stability of value not 
generally to be found in city loans ; their actual value 
rests upon a more simple foundation, and for this 
reason is not likely to be seriously affected during the 
ordinary life time of a mortgage loan by the many 
causes which affect city values. 



MORTGAGE LOAN VALUES 37 

From the land come the products which are essen- 
tial to life ; the towns and cities do not produce them ; 
they help to absorb and consume them; they collect, 
assort, exchange and distribute them; they change 
their form, combine them and make artificial pro- 
ducts from them, which, while not essential to life, are 
more or less important to civilization; but the land, 
in the first place, produces them. 

The value of city property therefore rests upon 
more complex conditions than does that of farms, and 
is subject to more changes and often to changes over 
which the owner has no control. The city, as a whole, 
may either gain or lose in its competition with other 
cities and in consequence its Real Estate values may 
rise or fall, its limits may be extended and new addi- 
tions laid out and improved so as to overshadow the 
older sections, once desirable business or residence dis- 
tricts may be shifted to other localities to the detri- 
ment of the old, and the value of a certain piece of 
property, which may have been, in a great measure, 
due to the former improvement of surrounding or 
nearby properties, may suffer a depreciation due 
wholly to their depreciation, without any changes 
whatever having been made in that particular prop- 
erty; but no similar facts apply to farms, for prac- 
tically all of the land that is suitable for agriculture 
has already been taken up and made into farms, each 
of which may be operated or improved in value as an 
independent unit in itself with little fear that it will 
ever suffer from any changes in its surroundings. 

The farm is not so sensitive to many other causes 
which may bring unpopularity and consequent loss of 



38 MORTGAGE LOAN VALUES 

value to a city locality, nor to the over- valuation inci- 
dent to "booms," for the measure of its value depends 
less upon an arbitrary public opinion; its perishable 
improvements also constitute a much smaller part of 
the security than they do in the case of city property, 
and in order to maintain their value it is not so neces- 
sary that they should be, or be kept, "up to date;" 
nor is the farm so liable to excessive taxation nor so 
likely to be charged with the cost of public improve- 
ments that may become a lien against it prior to the 
mortgage, which improvements are sometimes of little 
actual advantage to selling or income values. 

A remarkable illustration of what may unexpectedly 
happen in this way is that of the middle western city 
which replaced its old Court House with a modern 
million dollar structure and soon found that the value 
of the nearby business property had depreciated more 
than fifty per cent. The explanation, however, was 
simple, for the neighborhood business had been sup- 
ported by the trade of the farmers Avith whom the old 
Court House had been a popular meeting place, while 
the new one proved to be so unattractive to them that 
their trade soon drifted to other localities. 

Although the present market value of city property 
may be more readily determined, a safer basis for esti- 
mating loan values is undoubtedly true of farms, for 
these combine the homes and business of the farmers, 
and while unfavorable seasons or lower prices for 
farm products may temporarily affect their earning 
power, with ordinary industry these earnings will 
seldom fall below an amount necessary for the support 
of the farmer and his family and the payment of his 



MORTGAGE LOAN VALUES 39 

taxes and interest; nor does the farm, even under 
unfavorable crop conditions, often fail to furnish some 
part of the supplies which are needed by a constantly 
increasing city population, and whatever its earning 
power may be, to some degree at least it is a depend- 
able one, for farm products must always be in demand, 
although the enforced idleness of hard times may 
cause retrenchments sufficient to greatly lessen, if 
they do not temporarily destroy, the income value of 
city property. 

No valid objections, however, can be urged against 
the properly selected security afforded by either 
farms or city properties, and, although there are dif- 
ferences of opinion as to their respective desirability, 
it may be said that while the city loan is no doubt the 
most convenient for the investor or lender to handle, a 
contention in favor of the superior stability of farm 
securities seems to be sustained by the experience of 
the larger investing companies who have acquired 
fewer farm than city properties by foreclosure of 
mortgages and have suffered less ultimate loss in that 
class of securities, notwithstanding the fact that the 
managers of such companies have usually had a less 
intimate knowledge of the requirements of a farm 
loan business than they may easily have had or have 
acquired concerning a city loan business. 




IN THE CORN BELT 



40 



VI 

MORTGAGE LOAN TERRITORY GENERAL FEATURES 

The willingness or unwillingness of investors to 
enter any particular loan field rests (except as it may 
be affected by a local optimism) upon such conserva- 
tive opinions as may properly result from a knowl- 
edge of various relevant facts, few of which are con- 
clusive in themselves but each one of which has its 
proper place and weight when taken in connection 
with the others in determining the main question. 

It naturally follows, therefore, that different lend- 
ers and investors sometimes reach different conclu- 
sions as to the desirability of a certain territory, and 
while there is often ample 'ground for such differences 
of opinion even among experts, it is also true that 
investors are generally too much inclined to overvalue 
certain pet theories and either to accept or to reject 
any section of territory upon insufficient grounds, 
without waiting to assemble and digest all of the evi- 
dence concerning its advantages or disadvantages as a 
loan field. 

If the investor is cautious he will be little inclined 
to lead the way into untried territory but neither 
should he follow the lead of others until he has care- 
fully examined the field and convinced himself that 
the facts fully justify their decisions, for they may 
have either approved or rejected it on insufficient 

41 



42 MORTGAGE LOAN VALUES 

grounds, and before reaching a decision it is important 
that he should know to what extent it has been ap- 
proved by others, what rates and terms they grant 
therein, and whether or not the favorable view will 
release enough capital to care for its loan needs and 
its probable loan defaults. For to say the last word 
first concerning the desirability of any given territory 
for mortgage loan purposes, will be to say that the 
section should contain in itself, or be able to attract 
from outside sources, sufficient capital to absorb any 
defaulted loans which may have been originally made 
along sound and conservative lines, and this financial 
ability, whether it rests upon the use of home funds or 
of foreign capital, should be based upon local condi- 
tions which are not likely to lose their force and effect 
during the ordinary life of a loan. 

Before investigating the special features of any 
given loan field certain general facts should be taken 
into account, and it is perhaps best to consider first 
the State laws affecting mortgage loans therein, for 
the reason that these laws affect all of a large and 
well defined territory, and if the investor rejects the 
territory upon the ground that the laws are objection- 
able, all other questions as to that particular State are 
thereby disposed of. If, on the other hand, he finds 
this feature to be unobjectionable and decides to enter 
the territory, he will already have acquired at least 
some small part of the knowledge necessary for the 
protection of his interests. 

While the laws of the various States differ with re- 
spect to many matters which are of interest to invest- 
ors, and although such laws often seem, at first sight, 



MORTGAGE LOAN VALUES 43 

to be unfavorable to the lender, they are seldom so ob- 
jectionable as they appear to be to those who are un- 
familiar with them, and the investor will find that 
loss or trouble may usually be easily avoided by the 
exercise of a proper degree of care. 

These laws touch the mortgage loan business at 
many, and sometimes at unexpected points — some are 
radical, while others seem to be of comparatively 
slight importance, some extend to the contractual 
rights of the parties, and others affect modes of pro- 
cedure only, but it is exceedingly important that all 
such laws should be fully understood, and that all 
of their requirements should be strictly complied with 
if any loans are made in that territory. 

It is a somewhat singular fact that investors gener- 
ally are also disposed to adopt State and County 
lines as defining the physical and moral as well as 
the legal limits of satisfactory or unsatisfactory ter- 
ritory, which rule does not seem to follow a practical 
view of the situation, for although State lines mark 
the boundaries wherein laws which may be regarded 
as being either favorable or unfavorable to the mort- 
gage loan business are operative, and County lines 
mark the boundaries wherein satisfactory evidence of 
titles may be easy or difficult to obtain, and County 
as well as City limits mark the lines wherein taxation 
may be excessive, or law enforcement lax, and while 
in such matters as these the civil boundary becomes a 
part of the question at issue, it is hard to understand 
why any such arbitrary limits should be adopted in 
other matters, as they are more apt to be misleading 



44 MORTGAGE LOAN VALUES 

than helpful in determining the loan value of the 
territory. 

It happens more often than otherwise that the terri- 
tory raider consideration, when taken as a whole, pre- 
sents both attractive and unattractive physical and 
moral features, and the lines of demarcation between 
those portions which measure up to a satisfactory 
standard and those which fail to do so should be made 
along other lines than those which have been pre- 
viously established for an entirely different purpose, 
— for instance, it may be wiser for an investor in farm 
loans to follow an exceptionally good section of land 
across a county line rather than to exclude that whole 
county (as is the practice of some investors) because 
in some sections its lands are of an inferior quality. 

Another general feature which should be consid- 
ered (more especially in the case of farm territory) is 
that of its altitude and climatic conditions, the annual 
amount and distribution of rainfall, the tendency to 
extremes of moisture or drouth, and the ability of the 
soil and usual crops of the section to resist the bad 
effects of such extremes ; and if irrigated territory is 
considered, the sufficiency, dependability and quality 
of its water supply and the legal status and priority 
of its water-rights must be carefully investigated. 

Another matter of importance is the general useful- 
ness of the territory; that is to say, a very large pro- 
portion of it should be productive; and it is also a 
good feature for its earning x^ower to be rather diverse 
than otherwise, or at least not confined within too nar- 
row limits, for to be a good loan field it must have 
the ability upon occasion to care for its own needs at 



MORTGAGE LOAN VALUES 45 

least temporarily. It should also have various attrac- 
tions which will tend to tempt outside capital; for 
example, a city which is almost wholly dependent upon 
a single industry, or a strictly "one crop" farming 
section cannot be said to be so attractive from a loan 
point of view as one which is supported to the same 
extent by the income derived from a variety of inter- 
ests or products, any one of which might fail without 
seriously impairing the general prosperity. 

If it is territory which is very largely dependent 
upon a single ' ' money crop ' ' the conditions surround- 
ing this crop should be studied and the suitability of 
soil, climate, labor and other conditions for the profit- 
able production of other crops, if this one should fail 
to remain profitable, should be considered. 

It may also be stated that one of the most tempting 
as well as one of the most dangerous sections in which 
a mortgage loan business can be undertaken is terri- 
tory which is experiencing a "boom," and that per- 
haps the most difficult task in selecting a loan field in 
new or developing territory is to distinguish between 
the evidences of a permanent and those of a temporary 
prosperity. 




46 



VII 

MORTGAGE LOAN TERRITORY SPECIAL FEATURES 

When considering the various matters which go to 
make up general conclusions as to the acceptability of 
loan territory it should not be expected that any one 
section, although satisfactory as a whole, will be found 
to be equally good in all of its parts or in all of its 
more desirable features. It should, however, be 
known to be generally good, and that its good features 
are based upon conditions that are not likely to change 
for the worse or to become relatively poorer in the 
general march of improvement, and it should also be 
known that a sufficient number of acceptable secur- 
ities can probably be obtained therein to justify the 
investor in thoroughly investigating it and in keeping 
in close touch with it during the life of his loans, and 
experience will teach him that he can not do these 
things from railway trains nor by confining his 
inquiries to those persons whose interests require that 
he should reach certain conclusions, but that he can 
only obtain reliable information by more painstaking 
and intelligent methods. 

Among the various local conditions which should be 
observed by him, some will of course show their char- 
acter upon the surface while others will require a 
closer observation and more careful inquiries, but in 
either case he should learn the facts, and it is desirable 

47 



48 MORTGAGE LOAN VALUES 

that they should show the territory to be reasonably 
well populated and to have comparatively few idle 
lands or vacant houses. Its labor conditions should be 
fairly good and its population in the main both pros- 
perous and law-abiding; the ownership of its Real 
Estate should not incline to single holdings of large 
blocks but should be well distributed, it being a good 
feature if owner occupants are numerous and absentee 
landlords scarce, and if some portions of the territory 
are undeveloped, it should be known why this is true, 
and to what extent, if any, they may be irreclaimable. 

The territory should be healthful and should have 
a good water supply and good drainage; it should 
not be especially liable to any disaster (such as flood 
damage) nor to any general failure of income; and 
all parts of it should be accessible by good streets or 
roads and have sufficient other transportation facili- 
ties to maintain the proper balance between its pro- 
duction and consumption at reasonable cost. 

There is another matter that enters into loan values, 
although not so often considered, which may be called 
the social value of the territory. This does not con- 
template on the one hand that it should have excep- 
tionally high social advantages, nor on the other that 
it should barely avoid feuds or conditions of general 
immorality, but only that its general social tone should 
be wholesome and unobjectionable to the average per- 
son who might not otherwise consider it as a suitable 
location for his home. 

If farm territory only is desired it should have in 
addition to the advantages heretofore enumerated, 
convenient schools and churches, fairly good and con- 



MORTGAGE LOAN VALUES 49 

venient local markets and shipping- points, and reason- 
ably good wagon roads over whieh its products may 
be transported. 

It should also be known to what extent it may con- 
tain faults that make the actual value less than the ap- 
parent value and yet do not appear plainly upon the 
surface at all seasons, such as portions containing un- 
desirable sub-soils or surface soils which for some 
reason are of inferior productivity although of the 
same color and general appearance as the lands not so 
affected. 

If city loans only are desired, the size and location 
of the city must be considered and its proportionate 
area and population ; the boundaries, natural or other- 
wise, that may limit or confine its growth to certain 
sections ; its transportation facilities, labor conditions, 
power and fuel supply and such other competitive 
advantages as it may have over other nearby cities; 
its financial condition, tax rate, fire protection, and 
public improvements, and the general class and char- 
acter of its population are all matters which should 
be taken into account. 

From a city loan point of view the importance of 
well balanced conditions is greater than is the mere 
fact of a large population, and the larger size of a 
city is never conclusive evidence of its greater clesir 
ability as a loan field; on the contrary it has, espe- 
cially if it is a growing city, at least one distinct disad- 
vantage in the greater liability to shifting values of an 
important character. It should, of course, be large 
enough to insure competition among buyers when 
real property is offered for sale at a fair bargain, 



50 MORTGAGE LOAN VALUES 

but Real Estate in a moderate sized town, one, for 
instance, which is principally dependent upon its 
agricultural surroundings, may have as safe a loan 
value in such amounts as are justified by its sur- 
roundings, as may a city of several times its size which 
is dependent upon less stable conditions, except that 
loan values are perhaps in more danger in the smaller 
cities because of an extravagance in expenditures for 
development and management, for this is a relative 
matter and in the smaller cities such expenses are apt 
to be greater in proportion to the taxable wealth than 
they are in the larger ones, and this may add an 
extra burden of taxation to Real Estate which, added 
to the cost of insurance and upkeep, may materially 
reduce its loan value by reducing its net earning 
power. 

It will be seen that the desirability of loan territory 
depends upon many different things, a number of 
which have been herein enumerated, but in consider- 
ing them, two facts must be kept in mind ; first, that 
while it is not necessary for the territory to greatly 
excel in any of these matters, a marked deficiency in 
any one of them is apt to be a serious objection; and 
second, that each feature should be measured at its 
true worth as modified by other existing conditions., 
the danger being that the investigator may allow his 
interest in some features to obscure the importance of 
others, or may cause him to overlook modifying con- 
ditions. 

Many illustrations in support of this fact could be 
given; for example, the inspector may be so greatly 
impressed by the heavy pay-roll of a town 's industries 



MORTGAGE LOAN VALUES 51 

that he will fail to give proper weight to the fact that 
these industries are very few in number and may not 
be permanent in location or successful in operation; 
or, when considering the importance to all parts of a 
farming section of convenient shipping points, he 
may lose sight of the fact that some crops can be 
transported much more cheaply than others, roughly 
speaking, the product of at least ten acres of lint cot- 
ton can be hauled on each trip to market by the same 
team that would only be able to haul the product of 
one acre of corn, and the money value of the load of 
cotton is usually even more than ten times that of 
the load of corn, and so the more comprehensive view 
shows the lack of numerous shipping points in one 
instance to be less objectionable than in the other. 



VIII 

METHODS OF SECURING MORTGAGE LOANS 

The question of what plan should be adopted in 
order to secure a satisfactory line of securities is one 
of considerable interest to the investor, and the answer 
depends somewhat upon the kind and amonnt of loans 
wanted and the territory from which they are to be 
drawn. 

This matter is one of especial interest to the investor 
whose yearly investment fund is a large one. and who 
is anxious to secure business but does not care to make 
any very large individual loans ; if he is very particu- 
lar as to the character of the securities which he will 
accept he soon finds that he cannot confine his busi- 
ness to too limited an area, for the simple reason that 
it will not afford a sufficient outlet for his funds; 
what outlet it does afford being apt to be divided by 
the competition of other investors. 

This, of course, is speaking of those cases where 
rather extensive operations are undertaken in medium 
sized loans and in the ordinary farm or combined farm 
and city loan business; because, if the investor con- 
fines his business entirely to city loans and operates 
only in a large city, and especially if he considers very 
large individual loans, he may in such cases maintain 
a close personal supervision over the placing of large 
sums; otherwise he will find it necessary to go into 

52 



MORTGAGE LOAN VALUES 53 

sections which are too remote from his home territory 
for him to give a close personal attention to the details 
of the business. 

The proper supervision of these details is quite im- 
portant, often vitally so, and it can only be accom- 
plished by the aid of a rather comprehensive knowl- 
edge of local matters. Therefore the investor finds 
that if he would maintain such supervision when he 
goes into new fields, he must have some sort of a 
local organization or connections therein upon which 
he can rely ; that he must have some one on the ground 
whom he is willing to trust with both preliminary 
and detail work, some one who can keep in touch with 
the territory and the loans, and with whom the bor- 
rowers can conveniently deal ; and that, otherwise, his 
business in that territory is apt to be either very light 
in volume, or unsatisfactory in character, or both. 

Although loans which have been made in territory 
where the investor has no representative may seem 
at first to be very attractive ones, their isolated situa- 
tion is liable to be a source of annoyance at least, if 
not of danger, for the investor cannot then pass intel- 
ligently upon such requests as are frequently made for 
partial releases, extensions of interest payments, priv- 
ileges of making changes in buildings or of selling 
timber, etc., nor can he, without a re-examination of 
the property, pass intelligently upon the desirability 
of renewing the loan when it becomes due, for, in 
addition to other difficulties, the security may be 
neglected or despoiled with little chance of his atten- 
tion being called to that fact. As a result the larger 
investors, seeking some more efficient and less ob- 



54 MORTGAGE LOAN VALUES 

jectionable plan, either establish local branches of 
their main organizations or form agency connections 
with local lenders. 

"Where such branch organizations are established it 
is usually for the purpose of procuring loans for 
investment purposes only, and of dealing as directly 
as possible with the borrowers. They are usually 
operated strictly upon a salary basis, no one connected 
with them having any interest in the success or fail- 
ure of any application, and they no doubt afford the 
investor the best possible control over the details of 
his business and enable him to require all forms and 
practices to conform to his rules. 

This plan is used with satisfaction and success by 
some of the more important investing companies, but 
ordinarily it may be said to be unsuited to the needs 
of those whose command of funds is at times limited, 
for it is open to the objection of not being elastic 
enough to meet the varying conditions of the business. 
To be effective and dependable such branches must 
be under very high class management and completely 
equipped for the work, and to be economical, they 
must not have periods of inaction while their over- 
head expenses continue; and this last requirement is 
practically impossible in organizations devoted ex- 
clusively to making such investments, for in any ter- 
ritory the demand for loans differs greatly and often 
unexpectedly at different times, and although such 
organizations may at all times be amply supplied with 
investment funds, they cannot well avoid periods of 
comparative idleness when there is a light demand. 

It is a very common practice, therefore, for inves- 



MORTGAGE LOAN VALUES 55 

tors, instead of establishing branch organizations, to 
procure their loans under some form of contract from 
a local trust or loan company which has been organ- 
ized, not only for the purpose of making Real Estate 
mortgages in a certain section, but also for the pur- 
pose of disposing of them to investors. 

Such lending concerns operate in almost every part 
of the country and are better able to avoid the diffi- 
culties which attend branches organized for invest- 
ment purposes only, for they work both the buying 
and selling ends of the business, and if sufficiently 
strong in finances or credit, they can make and carry 
loans during periods when their outlet may be tempo- 
rarily dammed and the demand heavy. Nor is the oc- 
casional necessity of doing this apt to embarrass them, 
for they seldom depend altogether upon a single out- 
let for the sale of their securities, and as they also 
frequently engage in other kindred lines of business 
such as banking, trusteeships, Real Estate or insur- 
ance, these additional lines furnish partial employ- 
ment for their loan employees and help to cover over- 
head expenses during dull loan seasons. 

In most cases, this seems to be the most satisfactory 
source through which the investor can get his securi- 
ties, and lending companies are very generally anxious 
to make loan connections with him for under normal 
conditions they are in the position of the dealer in 
merchandise who has less trouble in obtaining the 
goods to fill his shelves than he has in finding enough 
customers to make his business profitable. 

On the other hand, there are times when the money 
which seeks this form of investment is so abundant, 



56 MOKTGAGE LOAN VALUES 

either generally or in some particular section of the 
country, that the local lenders are in sharp competi- 
tion for securities instead of funds, and at such times, 
lenders are less anxious for connections with conserva- 
tive investors. 

This very easy credit condition sometimes has the 
effect of inducing overvaluations, etc., but when it is 
extreme it may always be expected to be temporary, 
for its evils will in time cure themselves and skillful 
and conservative lenders are usually able to secure a 
satisfactory line of securities, if not at once, at least 
within a reasonable time. 

"When an investor adopts this plan of procuring 
loans through the agency of others, it is of a primary 
importance to him that he should make the right con- 
nections, for many, even among those who bear a high 
reputation for honesty and general business ability, 
are unsafe persons to intrust with the making of mort- 
gage loans or from whom to buy them. 

It is also really remarkable what attractive looking 
references and what plausible statements and argu- 
ments can be presented by those with whom no loan 
connections should be made and sometimes even by 
those who are thoroughly unscrupulous, irresponsible 
and incompetent. 

It is true, however, that the less skillful and less 
conservative among them often have the least trouble 
in getting business, for they will take loans that more 
competent lenders refuse to consider, and they will 
also be found to be the most insistent when offering to 
sell them, and are always the ones who will offer the 
investor the greatest apparent bargains. 



IX 

IMPORTANCE OF PROPER LOCAL CONNECTIONS 

A very large proportion of the great number of 
mortgage loans which are absorbed each year by inves- 
tors are originally made for that market by local 
lenders, and as this seems to be the most available 
source of supply for the average investor the relations 
existing between the buyers and sellers of such secur- 
ities should be entitled to a careful consideration. 

(It should be kept in mind that distinctions are 
herein made for the purposes of this discussion, in 
the use of the words "investor" as one who procures 
mortgages for investment purposes, and "lender" as 
one who makes loans, acting either as the agent of 
the investor or with the purpose of offering the 
mortgages upon the market.) 

Danger lies in the path of the investor who is indif- 
ferent or careless as to the medium through which he 
gets his securities, for if he is, he will be very sure 
at sometime to find himself connected with persons 
who, however exceptional they may be in other re- 
spects, are lacking in what may be called mortgage 
loan judgment. 

They may, for example, be persons in whose minds 
one idea is apt to overshadow all others, and they 
may have false notions of the value of high interest 
rates, large commissions or other more indirect profits 
from loans. 

57 



58 MORTGAGE LOAN VALUES 

They may be unduly aggressive, and in following 
the main object of getting the business away from 
their competitors, may be disposed to minimize the 
faults of the security and to overrate its good points. 

They may be too optimistic and inclined to discount 
the future and accept promises of future betterments 
as accomplished facts, or to bolster up weak loans with 
personal indorsements or the stipulation for prepay- 
ments, which, if made, would make the loans good. 

They may be too politic and allow the high social 
or political standing of the applicant or the chance of 
granted favors being reciprocated, or even considera- 
tions of personal friendship, to have weight in their 
loan decisions. 

They may be too liberal in their interpretation of 
the ordinary loan rules, and what is most common, 
they may be too careless in the details of the work to 
fit the requirement of a businesslike investor. 

The loan connections which are made with local 
lenders are matters of grave importance and although 
the investor may realize that there are certain unde- 
sirable possibilities in ill-advised connections, unless 
he is exceedingly careful he may easily overlook im- 
portant points or be deceived by the fact of the lend- 
er's unquestionably high character and financial 
standing. 

If he is neither indifferent nor incautious, however, 
and makes an intelligent preliminary investigation of 
the proposed agency, there is little danger that he will 
make any serious mistake, for his choice is seldom cir- 
cumscribed in this particular and if the agency which 
is under consideration does not measure up to the 



MORTGAGE LOAN VALUES 59 

proper standard he can usually find other persons in 
that locality who are wholly competent and reliable 
and with whom he can form loan connections. 

If both the investor and the lender are experienced 
in the business and familiar with the contemplated 
territory, they are very likely to agree on all matters 
except perhaps as to the degree of importance which 
should attach to certain points — for instance, while 
they may agree on all other points, one may hold the 
personal hazard to be very important as indicating 
the probable performance or non-performance of the 
loan contract, and the other may give it slight consid- 
eration as being no real part of the security. 

It is very necessary that all such questions should 
be fully discussed and that the ideas of the investor 
and lender should be in harmony on all important 
matters; but prior to their discussion the investor 
should know that the lender has a practical knowledge 
of the conditions and values in all parts of the terri- 
tory in which he operates and that he is both honest 
and careful. 

He should also know that the lender is not only com- 
petent himself but that he maintains an efficient 
working force and does not trust to the work of 
"cheap" inspectors, attorneys and clerks and that he 
has a reputation among his borrowers for fair dealing 
and moderate charges, and among his competitors for 
understanding his business and taking none but good 
loans. 

The lender's business should also be a prosperous 
one, and he should have a fair amount of financial 
responsibility ; but in this matter of financial respon- 



60 MORTGAGE LOAN VALUES 

sibility the investor should weigh the facts very care- 
fully, remembering that the reputation of possessing 
large means often carries with it an undeservedly good 
reputation in other matters, and that the lender may 
for that reason, and independently of the true facts, 
bear a reputation for possessing other qualifications 
which he does not possess, and which are of greater 
importance to the investor than is the single one of 
his having abundant funds. 

While investigations along the above mentioned 
lines should be very thorough and while nothing 
should be accepted that is not found to conform to 
sound practice, the investor should not lose sight of 
the fact that the fully competent lender Avill under- 
stand the peculiar needs of his own organization, his 
territory and his borrowers better than they are likely 
to be understood by the investor ; and unless he is will- 
ing to recognize this fact there will be many occasions 
for needless friction in their business relations, to the 
disadvantage of both. For instance, the investor who 
makes loans directly to borrowers will follow certain 
rules and practice in the matter and although these 
may be suited to the class of property and the terri- 
tory where they are applied, they may not be well 
suited to other conditions. Nevertheless he may insist 
that they shall be followed by the lender or corre- 
spondent who represents him in another section where 
they are not applicable — as did the northern investor 
in southern securities when he insisted that each house 
must have a good cellar. 

Mistakes of this kind are not likely to occur, how- 
ever, if the investor is able to go upon the ground 



MORTGAGE LOAN VALUES 61 

and to become personally acquainted with the condi- 
tions before entering any given field, and it is very 
desirable that he should do this if possible, for it may 
not only reveal facts which otherwise might be un- 
thought of by him but it will afford him the oppor- 
tunity for understanding any peculiar requirements 
of the territory which should be taken into account in 
his dealings with the lender, and an examination of a 
number of securities that have been accepted by the 
lender will indicate more clearly than would any 
other test the measure of that lender's knowledge of 
the loan business and his conservatism and the char- 
acter and efficiency of his organization and equip- 
ment. 



BLANK APPLICATION AND REPORT FORMS 

The equipment of the lender should of course in- 
clude all of the necessary blank forms, and these 
should be very carefully prepared ; each form should 
be submitted to a competent attorney of the State in 
which loans are to be made, and his opinion, of course, 
should be regarded as sufficient and final concerning 
all such blanks as deeds of trust, mortgages, notes, 
bonds, affidavits, disclaimers, etc., the proper form 
and substance of which are necessary to the legality of 
loan transactions. 

There are also certain preliminary papers which 
are of importance, such as applications, inspection 
reports and agency contracts. The form of these 
blanks should also be approved by the attorney but 
they should not be adopted by the lender until they 
have also been passed upon by a practical loan man 
who has had experience in the territory and with the 
class of securities under consideration. 

No loans upon Real Estate should be considered 
unless they are based upon written applications and 
reports but the forms for these are often carelessly 
adopted in the belief that such things are of a second- 
ary importance inasmuch as their use is not essential 
to the legality of the loans, which conclusion is only 

62 



MORTGAGE LOAN VALUES 63 

true in the same sense that it is true that an abstract 
of title is not essential; and there is quite as little 
reason for indifference or carelessness in regard to 
one as to the other, for the facts in each matter are 
really of vital importance and while the abstract pur- 
ports to show them as to the title, the application, in 
connection with the inspector's report, is expected to 
show them as to the physical and moral features of 
the security. 

The application, when accepted, forms the basis of 
the loan contract, and it is important that this blank 
should provide for statements and answers which are 
simple and concise as well as comprehensive ; it should 
provide for all necessary statements and for no un- 
necessary ones ; and it should also be suited to the ter- 
ritory and to the general class of business for which 
it is intended to be used. 

Certain facts must be shown in a farm application 
which would not be at all pertinent to a city applica- 
tion and vice versa, nor do the requirements for the 
same kinds of property always conform in these re- 
spects when the properties are located in different 
sections ; for instance, those facts relating to irrigation, 
or homestead rights, or diversity of crops, etc., which 
are necessary to be known in one section may be 
wholly irrelevant or of very minor importance in 
another. It should not be attempted, then, to make a 
single blank form cover too wide a field. 

Almost any applicant will overestimate the merits 
of his offering, and will seek to avoid any admission 
of its faults, and if the application blank provides 
for statements or answers where the facts can only be 



64 MOETGAGE LOAN VALUES 

estimated, such, estimates will seldom be found to be 
dependable ; and if it provides for answers which will 
not be insisted upon by the lender, or contains ques- 
tions which may be confusing to the applicant or 
otherwise hard for him to answer correctly, or if it 
provides for information which is not fully applicable 
to the matter in hand, a large proportion of the ap- 
plications submitted will be imperfectly filled out, 
not only as to these, but also as to other matters. The 
blank should, therefore, be one which, the lender can 
consistently insist shall be fully filled out before it 
will receive his consideration. 

The application should state the amount, the time, 
the rate of interest, and the terms of the proposed 
loan ; it should give a legal description of the property 
which would be sufficient to enable a surveyor to posi- 
tively locate and plat it and should also contain a 
statement of the location, general characteristics, im- 
provements, use and occupancy of the property which 
would be sufficient to enable an inspector who is not 
a surveyor to positively locate and identify it. 

It should give a statement of the main facts which 
go to show the present value and earning power of 
the property, and a brief statement showing the kind 
and present condition of the title under which the 
applicant claims ownership and of any claims or mat- 
ters which might become claims against 'it. 

It should contain a brief personal and financial 
statement giving the applicant 's age, business and ad- 
dress, and if married, the name and age of his wife, 
and an approximate estimate of his holdings and his 
indebtedness, and should also state the purpose for 



MORTGAGE LOAN VALUES 65 

which the money is to be borrowed ; and it should give 
a short statement covering any agreements made as 
to the furnishing of abstracts, the payment of taxes 
and insurance and of any expenses that may be in- 
curred in making and caring for the loan. 

The application should be made by the owner of 
the property and signed by him in person ; and if he 
is required to make affidavit as to the truth of his 
statements it will often afford the lender some protec- 
tion against careless statements or attempted frauds. 

The inspector's report blank is not subject to the 
same requirements as is the application blank in those 
matters which are a part of the loan contract, nor 
to the same requirements as to simplicity and brevity, 
but it is also a very important loan paper. Like the 
application blank it should be suited to the territory 
and class of property for which it is to be used, but it 
may and should embody reports on any or all other 
matters which will assist the lender in reaching proper 
conclusions. Its most vital part is perhaps its showing 
that the property has been visited and examined by 
the inspector and has been positively identified by 
him as that offered in the application, for, unless this 
is the fact, any such report is far worse than useless. 
(In this connection it may be remarked that a photo- 
graph of city property, or a plat of farm property, is 
always of value.) 

The inspection report should go to the verification 
or correction of the statements made by the applicant, 
and should go much further than does the application 
into those details which, taken in the aggregate, indi- 
cate the general desirability of the security, its de- 



66 MORTGAGE LOAN VALUES 

pendable income capacity, its ability to withstand mis- 
management or neglect, its availability for other pur- 
poses than its present nses, and its salability under 
any adverse conditions that are likely to arise during 
the life of the loan. 

Any physical, legal, or business conditions which 
are peculiar to the section should also be shown in 
their relation to the property under consideration; 
for instance, the liability of overflows or erosions, un- 
usual homestead and exemption laws, irrigation mat- 
ters, one crop conditions, etc. It should show the 
general moral hazard as indicated by the surrounding 
conditions of prosperity, and also show the results of 
an investigation of the personal hazard; it should 
show by whom the property is occupied and the 
nature of his claim of right to such occupancy, and it 
should show in detail and in the aggregate, the inspec- 
tor's opinion of the present cash market value of the 
property, and contain his definite recommendation as 
to the amount which should be loaned upon it. 

Certain facts in addition to those relating to the 
contract itself are always necessary to be first shown 
by the application in order that the lender may be 
able to judge in advance of an inspection whether or 
not it may be worth while to make one, but as the 
applicant is always an interested party it is a safe 
rule for the lender to depend so far as possible upon 
an expert and unbiased inspection report covering all 
of the material facts, and especially all such facts as 
might be colorable by the applicant's self interest. 



XI 



LOCAL LENDING AGENCIES 



The lender who deals only in city loans usually 
obtains both his borrowers and his investors through 
the general publicity which he gives his business, his 
financial standing furnishes him with one of his prin- 
cipal arguments, and, in a way, his relations with both 
borrowers and investors are on a more impersonal 
basis than is the case in a farm loan business. 

On the other hand, the lender who deals in farm 
securities usually depends more upon the efforts of 
his sub-agents to secure his business, his borrowers 
are apt to be less impressed by his financial condi- 
tion than they are by his reputation for fair dealing, 
and while his business relations are usually with 
fewer investors they are more likely to be subject to 
the terms of a specific contract which anticipates a 
continuation of the business. 

The business understanding between the investor 
and the lender is in some cases simply a working agree- 
ment and in others it takes the form of a written con- 
tract. In any case its provisions follow along certain 
lines which, in the main, are very similar to one 
another, although they sometimes differ as to details, 
but it is of great importance that in every case it 
should be comprehensive and clearly understood by 
both parties. 

67 



68 MORTGAGE LOAN VALUES 

Ordinarily the investor agrees, at least tentatively, 
that he will make investments from time to time of 
estimated approximate sums in certain designated 
territory, in securities of a stipulated class and char- 
acter, at a stated rate of interest and on certain speci- 
fied terms of contract with the borrower, and that he 
will recognize the lender as his local correspondent 
in such territory; and the lender on his part agrees 
that, so far as he is able to do so, he will furnish the 
investor with the desired amount of securities, which 
shall conform in all respects to his requirements. 

The amount of securities to be furnished by the 
lender, and of the funds to be supplied him by the 
investor can only be estimated at the outset, for the 
lender can have no real control over the demand for 
funds in his territory, and the investor may easily 
find it difficult to adjust his available capital to any 
unusual or unexpected requirements. 

The lender usually wishes to make as definite an 
arrangement as possible with an investor who can 
furnish with reasonable regularity an amount of 
funds for investment at an interest rate and upon 
terms all of which will enable the lender to furnish 
the desired securities with profit to himself; but in 
addition to making connections which give promise of 
proving satisfactory in this respect, it is quite import- 
ant to the lender that they should be such as will aid 
him in maintaining his organization, and keeping in 
as close touch as possible with his borrowers in order 
that he may profit by their future business. 

To the end that he may accomplish this purpose and 
at the same time offer inducements to the investor, 



MORTGAGE LOAN VALUES 69 

the lender usually agrees that, until any loan is paid, 
he will cause the property to be kept insured in ac- 
cordance with the terms of the mortgage or deed of 
trust, that he will see to the payment of all taxes and 
assessments that may become a lien against the prop- 
erty, and that he will attend to the collection and re- 
mittance of interest to the investor, all without any 
charge for such services. 

He will guarantee the title to the property to be a 
marketable one (there being but few perfect titles), 
and that the mortgage or deed of trust is a first lien 
against it, and will also guarantee that if the property 
is re-examined by the investor within a certain stipu- 
lated time, it will be found to be satisfactory to him, 
and that if found to be unsatisfactory, the loan will 
be at once taken up and repayment made. 

The attempt is sometimes made to cover this point 
by a guarantee that upon examination the property 
will be found "to be as represented" but this form is 
objectionable, as it opens the door for misunderstand- 
ings and discussions that are based upon difference of 
opinion and judgment only. 

In these agreements a stated time is usually allowed 
the investor for making re-inspections of the securities 
he purchases, and he should insist upon the time al- 
lowed being ample for the purpose, and should never 
neglect to have such inspections made. 

It is also very important that the person who does 
this work should be expert in that line, not only that 
he may do justice to the interests of the investor, but 
that he may not cause an injustice to be done to the 
lender by requiring him to take up loans which should 



70 MORTGAGE LOAN VALUES 

have been approved. Nor is this the only reason, for 
if he is incompetent he will never be able to conceal 
that fact from the lender, whose poor opinion of 
the inspector's ability to protect the interests of his 
principal may tempt him to seek advantage to him- 
self from that fact. 

In selling his mortgages the lender sometimes makes 
a broader guarantee than the one above indicated, fre- 
quently he does not specify any time limit within 
which the re-examinations shall be made and some- 
times even goes to the extent of indorsing the notes of 
the borrower. 

The danger of loss to him by reason of such broad 
guarantees is small provided all of his securities have 
been wisely and carefully selected, and it may be made 
yet smaller if, by its terms, he is allowed a reasonable 
time after any foreclosure of a loan before it becomes 
effective. But any such guarantee is nevertheless of 
doubtful value, for it unavoidably creates a contingent 
liability against the maker which, although small at 
first, may develop a dangerous growth unless all of 
his loans are very judiciously made, for each loan 
that is made adds its new liability, and each year that 
passes brings changes in the old securities which may 
add more, until, if his business is considerable, his 
guarantee becomes practically worthless. 

It is true that if the lender is naturally conserva- 
tive and cautious the making of a broad guarantee 
may incline him to be more so and cause him to esti- 
mate with greater care the possibility of any future 
depreciation in values, and therein lies the only ad- 
vantage it gives to the investor; for if the lender is 



MORTGAGE LOAN VALUES 71 

not naturally conservative and cautious, the making 
of such guarantee will hardly make him more so. In- 
stead, he will be inclined, despite any guarantee which 
he may make, to ignore a danger of loss that seems to 
him to be remote, and he may be tempted to use the 
guarantee to strengthen otherwise weak loans. 

It is also true that the investor may be disposed to 
lean upon a broad guarantee as being at least some 
part of his security, and that he may either neglect to 
make careful re-examinations of the securities, or to 
accept those which he would otherwise decline as not 
measuring up to his standard, and thus rest to some 
extent upon a guarantee that might easily prove to be 
a mere rope of sand. 



XII 

CONTRACT BETWEEN INVESTORS AND LENDERS 

There are several other matters pertaining to the 
business relations of investors and lenders which, 
whether or not they are made parts of a specific 
written contract, should be clearly understood by 
'the interested parties before any loan connections are 
made by them. 

It should be understood, for instance, that all forms 
used by the lender shall be satisfactory to the investor 
and that the forms of notes and mortgages or deeds of 
trust shall accord with the approved legal forms of 
the State in which they are used, and it should be 
stipulated that no loans shall be made, either directly 
or indirectly, to any persons having an interest in the 
agency contract. 

It should also be understood and agreed that in all 
matters, and especially in those involving the pay- 
ment of commissions and expenses, the treatment of 
the borrower by the lender shall be fair and reason- 
able, for the reason that the satisfied borrower adds 
to, and the dissatisfied one detracts from, the desir- 
ability of the security. 

Nor should the investor on his part ever attempt to 
drive a hard bargain with the lender, for if he should 
induce him to give more than he can afford, he may 
expect that the evil consequences will, to some extent, 
re-act upon his own interests. 

72 



MORTGAGE LOAN VALUES 73 

The lender who wishes to make a loan connection is, 
in fact, alwaj^s inclined to offer all that he can reas- 
onably afford to give ; indeed, the competition of 
others who desire the connections is apt to make it 
necessary for him to do so, bnt if he deals only in the 
best class of securities he cannot offer as high a rate 
of interest as can the lender who deals in more doubt- 
ful loans; if his charges against the borrower are 
reasonable ones he cannot offer the amount of broker- 
age that he otherwisa might offer; if he is wholly 
responsible financially he will scarcely make the 
sweeping and unlimited guarantees which a more 
irresponsible person would make, and, all in all, the 
measure of his willingness to give more than others 
are willing to give is often, if not always, inversely 
the measure of the desirability of his connection. 

The investor is usually a city man and if his busi- 
ness is confined to city loans he will deal with matters 
upon which he is likely to be well posted, but the farm 
loan business has peculiarities with which he is not so 
apt to be thoroughly familiar, and he will perhaps, in 
such cases, frequently find himself hampered by his 
lack of knowledge concerning the field conditions. 

It is quite important, however, that he should un- 
derstand them; he should understand, for instance, 
that the lender who covers a farm loan field finds it 
necessary to have sources through which he may 
receive applications in proper form from the various 
neighborhoods or counties in which he operates, and 
through which he can obtain at first hand reliable 
information as to the loan offerings. 

He should understand that the personal acquaint- 



74 MORTGAGE' LOAN VALUES 

ance of the prospective borrower with a person who 
has access to loan funds, and in whose reputation for 
fair dealing he has confidence, plays an important 
part in the initial step in almost every farm loan 
transaction, for the borrower will almost invariably 
go to such a person in preference to going to others. 

Other considerations also enter into the situation; 
for instance, the applicant himself is seldom expert in 
filling an application blank properly, and is apt to 
overstate the facts which are favorable to him and to 
ignore or minimize those which are unfavorable ; there 
are also many persons who, if allowed to do so, will 
present applications which are not worthy of any 
consideration. 

It is very necessary then that the lender should 
have local representatives or snb-agents who are 
active, well known and respected, in order that at 
least a fair share of the best business may be obtained, 
and it is also important that they should be compe- 
tent, careful and locally well informed in order that 
bad business may, as far as possible, be weeded out at 
its source. 

The comparatively limited area which constitutes 
an ordinary farm loan field is therefore organized by 
the lender, into what may be called neighborhood or. 
county units, in each of which he arranges with a 
local bank or an attorney or a Real Estate dealer to 
act for him upon a commission basis in procuring ap- 
plications and in doing such other preliminary work 
as may be required. 

The proper selection, training and oversight of 
these sub-agents is attended with much work and 



MORTGAGE LOAN VALUES 75 

many difficulties, and those among them who are able 
to use good loan judgment and are persons who may 
be depended upon to present all matters fully and 
honestly are very valuable assets to the organization 
of any lender as well as to the investors with whom he 
may be associated. 

The investor may, when necessary, go upon the 
market and purchase the needed securities that his 
regular loan correspondents have failed to furnish, 
although it is less satisfactory to do this than it is to 
get them through tried and proved sources, but, on 
the other hand, the lender whose outlet connection 
fails, is placed in a much more serious situation, for 
relief is more difficult to obtain and unless it is ob- 
tained promptly the disturbance to his business is 
greater. 

He cannot, of course, hope to retain the services of 
his sub-agents unless he is able to give their offerings 
reasonably prompt attention and for this reason he is 
little inclined to depend wholly upon connections 
which are barely sufficient to meet his average needs, 
and his usual practice is to guard this point by pro- 
viding for more than one outlet for his securities. 

He at least endeavors to secure some minor con- 
nections which upon occasion might be developed or 
which might be made to serve temporarily to bridge 
over the loss of his principal outlet if that loss should 
occur. 

The fact of a lender having agency arrangements 
for the same territory with more than one investor is 
not necessarily harmful to the interests of any of 
them, but this situation should be watched, for it con : 



76 MORTGAGE LOAN VALUES 

tains possibilities for the opportunist and might be 
made to favor one investor as against another. 

No lender, for example, may hope to make any 
great nnmber of loans each of which will measure up 
to an equal standard of excellence, and it will be but 
natural for him to present his best offerings to the 
investor whose business he values the most highly and 
his less desirable ones to those whose business is not 
so important to him or who are disposed to drive hard 
bargains in interest rates, expenses or discmints. 

It may be urged in answer to this that if the secu- 
rities are safe that that is all the investor need ask, 
for in no case could he collect more than was owing to 
him and that their re-inspection should cover this 
point; theoretically this answer is sufficient but the 
practical loan man knows that there is a very real 
difference in desirability even among loans that are 
not affirmatively bad, and that such difference often 
depends upon facts which could easily be concealed 
from the most expert inspector. 

The investor should also know the form and nature 
of the lender's profits; the borrower, as a matter of 
course, pays all of the expenses and profits incident 
to his loan transaction ; the sum which is thus charged 
against him being calculated to cover the necessary 
expenses of his loan, with a reasonable amount added 
as his share of the general expenses and just profits of 
the lender. The plan which is adopted for the pay- 
ment of these charges is largely governed by local 
usage; sometimes the payment is in the form of a 
cash commission, sometimes in an agreed sum secured 
by a second mortgage and sometimes it is covered by 



MORTGAGE LOAN VALUES 77 

an excess of interest above the rate at which the loan 
is made for the investor. 

When a cash commission is paid by the borrower the 
interest of the lender in the loan is to some degree 
ended, and for this reason there wonld seem to be 
an advantage to the investor in either of the other 
plans, for then the lender's interest continues for a 
time at least; but whatever plan is followed in this 
matter, the main interest of the investor is in the 
reasonableness of the lender's charges. 

In considering this feature the investor should 
remember that the legitimate overhead expenses inci- 
dent to making loans in some sections and in some 
classes of securities are much greater than in others 
and he should be very sure that the lender's mind is 
not clouded by a greed that will incline him to avoid 
any proper expenses in order to increase his own 
profits, or to impose any harsh terms upon the bor- 
rower to that end. 



XIII 

BUSINESS RELATIONS OP INVESTORS AND LENDERS 

It is desirable in the interest of the clear under- 
standings and just actions which will tend to make 
their relations pleasant as well as profitable that the 
investor and lender should each be as well informed 
as possible of conditions ' [ at the other end of the line, ' ' 
for it is one of those connections in which each party 
may advance and protect his own interests by the 
consideration which he gives to the interests of the 
other. 

The lender therefore should endeavor to maintain a 
dependable organization in which no "slipshod" work 
is permitted ; he should endeavor to obtain and keep a 
satisfactory and satisfied line of borrowers who will 
realize the importance of complying strictly with the 
terms of their loan contracts ; and he should endeavor 
to take without any unreasonable delay such loans as 
may prove to be desirable. It is not intended to say, 
however, that these matters should ever be hurried, 
for no more dangerous practice could be followed, but 
only to say that there should not be any unnecessary 
delay, for this would be manifestly unfair to the ap- 
plicant whose need for prompt action may be urgent 
and who agrees to accept the loan if it is granted and 
thus bars himself, pending its acceptance or rejec- 
tion, from securing it from another source. 

78 



MORTGAGE LOAN VALUES 79 

When offering loans to the investor the lender 
should confine himself to the class and character of 
securities which the investor has indicated as being 
satisfactory to him, and should refrain from present- 
ing such as would for any reason be exceptions to the 
agreed class although he may consider them to be 
good loans, because if the investor has defined certain 
lines, he usually wishes to stay within their limits and 
does not care to consider "exceptions." 

He should also appreciate the fact that the investor 
desires his investments to be as permanent as possi- 
ble and that he will not be pleased with propositions 
to disturb them by partial releases, unauthorized 
repayments, etc., after the minds of the parties have 
met upon the terms of the contract and the loan has 
been closed. 

He should know that if he sends incomplete and 
imperfect applications and reports to the investor, in 
which there are obvious mistakes or mis-statements or 
unfilled blanks or the "illuminating" answers given 
that the applicant "don't know" or "can't remem- 
ber, ' ' that the case is not advanced but that this prac- 
tice is, at best, only a source of annoyance and delay, 
and that carelessness on his part even in compara- 
tively unimportant matters may cause the investor to 
doubt his entire reliability in more important ones. 

He should keep the investor informed of any chang- 
ing conditions that may effect his securities, and if 
he makes advancements to borrowers for the purpose 
of paying taxes, insurance or interest, he should fully 
inform the investor of that fact. 

It will also be seen that in furtherance of satisfac- 



80 MORTGAGE LOAN VALUES 

tory relations, the investor on Ms part should main- 
tain as nearly as possible a definite and dependable 
assignment of funds to the lender and grant him such 
a rate and terms as will enable him to do a profitable 
business in the best class of securities and to handle 
all of the details of the work with the help of the most 
expert assistants. 

Unless the lender can do these things, his organiza- 
tion will soon be disturbed and will often suffer dam- 
age in places where it will be difficult or impossible 
to restore it; his most valuable connections may be 
lost to him and the best offerings go elsewhere, and, 
in endeavoring to hold on to his own profits, he may 
attempt to do so by cutting down the proper class of 
work in investigating and closing his loans or by deal- 
ing in a cheaper class of securities. 

The volume of business which is done through such 
connections must also rest largely upon the good faith 
of each party to the contract in working for the in- 
terests of the connection, and, to a certain extent, 
changing conditions of supply and demand may be 
foreseen and provided against by them. 

Either condition of a heavy or a light demand for 
money is indeed apt to be a cause for an opposite con- 
dition to exist in its supply ; a period of heavy borrow- 
ing diminishing the supply and a period of repay- 
ments increasing it, with the compensating fact, how- 
ever, that a strong demand in any section has a ten- 
dency to attract capital and that a weak demand 
inclines it to seek investment elsewhere. 

It will be noted in studying the probabilities of 
future demands and future repayments that the im- 



MORTGAGE LOAN VALUES 81 

mediate effect of unusual or increased earnings from 
Real Estate in any section is that of the repayment of 
mortgage loans, and that, if such prosperity continues 
and seems to become stable, there is a secondary effect 
of increased borrowing for the purposes of investment 
and development. 

On the other hand, if the productivity of the Real 
Estate should be lessened, the first effect may be seen 
in an increased demand for funds with which to adjust 
unexpected losses, but if the bad conditions should 
continue they will not only have the effect of dis- 
couraging investments and development, but will 
cause owners to relieve themselves, so far as they are 
able to do so, from the burden of the mortgage debts 
which they may owe, and so, as has been said else- 
where, there is a smaller demand from desirable bor- 
rowers during hard times than there is during good 
times. 

The probabilities for future business may thus be 
anticipated to a certain extent, and while its volume 
cannot be definitely known, intelligent co-operation 
of the investor and lender will often serve to prevent 
greatly mistaken estimates in this matter as well as 
mistakes in other things. 

To those who may think that undue emphasis has 
been given in these comments to the dangers of ill- 
considered loan connections it may be said that, 
while perhaps a very large majority of the persons 
who are engaged in the business are both competent 
and honest, there are at least some who are neither, 
and that it is a very easy matter for the legal respon- 
sibility of the principal for the acts of his agent to be 



82 MORTGAGE LOAN VALUES 

established. It may also be said that these various 
matters have been mentioned with some particularity 
for the primary reason that false views respecting 
them will breed errors of policies and practices that 
may lessen the loan values of the securities taken,, and 
for the main reason that in a legitimate mortgage loan 
business there is no room for losses. 



XIV 



CONTRACTS WITH BORROWERS — AMOUNT 

There are a number of things, such as the amount 
of the loan, the time it is to run, the rate of interest 
which is to be paid and its other terms and conditions, 
that are necessarily matters of contract between the 
lender and the borrower; and these things should be 
definitely determined and agreed upon before any 
specific investigation of the security, title or personal 
hazard is entered into. 

The lender is theoretically in a position (within the 
laws as to usury) to dictate his requirements in these 
matters, but in practice he will find that his policy, to 
be successful, must be governed and modified by the 
various loan conditions presented by different classes 
of securities, different conditions of territory, differ- 
ent State laws, and different loan competition. 

He will also find that the policy which he adopts as 
to one matter will often indicate the policy that must 
be adopted in another ; for instance, if he demands an 
unusually wide margin of security he will find that he 
must be more liberal as to time and terms and interest 
rates; if he demands the maximum interest rates he 
will find that he can not be so exacting in other mat- 
ters ; and if he adopts any policy which fails to recog- 
nize this principle he will simply fail to get a desirable 
line of offerings. 

83 



84 MORTGAGE LOAN VALUES 

One of the first and principal provisions of the loan 
contract relates to the amount which shall be loaned 
upon the security offered, and the principal rule 
adopted by the lender to cover this point usually fixes 
a certain per cent, of the market value of the property 
as the maximum loan limit ; sometimes the lender also 
fixes an arbitrary loan limit which he applies to any 
security or to certain classes of property, independ- 
ently of the market value. 

The rule limiting a loan to an amount not exceeding 
a certain percentage of the market value of the secu- 
rity, presupposes such value to have been accurately 
determined and to possess a reasonable stability. The 
value of the rule depends absolutely upon this founda- 
tion and when too optimistic views of these matters 
are accepted, which is often the case when lenders are 
either inexperienced or over-anxious to obtain busi- 
ness, the mistake will be a fruitful cause of an unsat- 
isfactory experience in the mortgage loan business. 

If this danger is provided against, however, the 
question is then fairly upon the percentage of the 
market value which is safe as a basis for loans, and 
it may be said as to this that the per cent, should be 
small enough to leave a margin of value in the prop- 
erty sufficient to cover the costs of a possible fore- 
closure and sale and to provide for the accumulation 
of interest, taxes, insurance and other charges in event 
of their payment being defaulted either before fore- 
closure or during any period of redemption which may 
be allowed by law. It must also be sufficient to cover 
any depreciation in the market value of the property 
which is likely to occur during the life of the loan, 



MORTGAGE LOAN VALUES 85 

or which it might suffer because of the condition of 
an enforced sale. 

This limit of safety under the percentage rule is 
variously estimated by different lenders to be from 
forty per cent, of the value of the property by the 
more conservative ones, to sixty per cent, by the more 
liberal ones; but as a forty per cent, rule practically 
shuts out a great deal of good business and sixty per 
cent, sometimes leaves too narrow a margin of value 
above the loan, conservative lenders very generally 
agree upon fifty per cent, as being more satisfactory, 
although, as the perishable improvements are more 
apt to depreciate, a rule limiting loans to fifty per 
cent, of the value of the ground, and forty per cent, 
of the value of the improvements, is adopted by some 
and is perhaps a safer one. 

This, of course, refers to ordinary loans which are 
subject to the ordinary conditions in other matters. 
If the loan is made for an unusually long time, how- 
ever, the lender is apt to be more conservative as to 
the amount, while if it is to be made on an amortiza- 
tion plan he may (perhaps with less reason) be in- 
clined to be more liberal. 

It is a common practice also for lenders and inves- 
tors to adopt arbitrary rules as to the maximum and 
the minimum amounts which they will consider in 
single cases. They ordinarily feel that it is not a good 
business policy to place any very large part of their 
funds in a single loan, and so they follow the homely 
philosophy of "not putting too many eggs in one 
basket. ' ' On the other hand they realize that the time 
and money necessarily expended in making and caring 



86 MORTGAGE LOAN VALUES 

for a small loan is almost, if not quite, as great as it is 
for a larger one, and that proportionately it is always 
greater, and there is, therefore, a minimum limit 
below which they cannot afford to go. 

The policy which is followed in these matters, how- 
ever, often depends upon circumstances ; in some cases 
it depends upon the amount of loan funds which the 
lender may control, and in others upon the ability of 
his organization to care for smaller details with 
economy. 

The rules above mentioned are often thought to 
cover all that is necessary in defining the proper loan 
limits, but there are cases of rather frequent occur- 
rence where the application of these rules will fail to 
fully protect the interests of the lender ; for example, 
the dependable average net income producing capacity 
of the property is not always a controlling factor in 
establishing its market value, as is often the case with 
an expensive residence or a farm which is supposed to 
have a "proximity" value, and if its present market 
value is based upon some less stable foundation than 
that of its dependable income, that value may not 
be maintained during the life of the loan. 

The safety of the investor or lender, then, often 
calls for an arbitrary rule that loans in excess of 
certain fixed sums shall not be made on certain 
classes of property, notwithstanding the fact that 
their present market value is ample ; and such a rule 
is usually applied on an acreage basis to farm loans 
and is even more arbitrarily applied to detached 
dwelling house city loans. 

Such rules are wise and useful only when their 



MORTGAGE LOAN VALUES 87. 

terms have been very carefully considered in connec- 
tion with the circumstances which may affect the 
generality of cases, for it is very easy to make such 
mistakes as that of establishing too low a limit and 
thus shutting out the better offerings, or that of 
adopting too high a limit and thus inducing the con- 
sideration of offerings at valuations which are based 
upon temporary high prices or upon the cost of the 
property rather than upon its average earnings or the 
competition among buyers which may be expected if it 
should be offered for sale. 

None of these rules, however, is intended to fix the 
amount which, under a given set of facts, is always a 
safe or desirable one to be loaned; but on the other 
hand each is intended to fix a limit above which, in 
the average case, a loan will not be safe and desirable, 
which is quite a different thing. 

It is the rule of some investors (especially in the 
matter of farm loans) that only the producing parts 
of the property shall be considered and others desig- 
nate the proportion which must show a present income 
value. 

These rules, however, fail to recognize the fact that 
the proportional relationship between income values 
and market values is not always the same, and that 
while the income from the producing parts of an of- 
fering may be sufficient to justify a loan of a certain 
amount, the market value of this part alone (which is 
acceptable under such rule) may fail to do so, or, 
while the market value of the entire property may 
be ample, the net income from the producing portion 
of it may be so reduced as to be insufficient if it is 



88 MORTGAGE LOAN VALUES 

charged with the cost of maintenance of the whole 
property. 

A more practical rule therefore would seem to be 
that the property as a whole should be subjected to 
each test, for a portion of its actual market value is 
often based upon the potential income value of its 
undeveloped parts and is entitled to consideration 
provided that the developed income value is sufficient 
to warrant the loan. 

Although loan offerings may technically measure 
up to the required standard, they will often be found 
to contain certain features that are not wholly unob- 
jectionable; some doubt may be felt as to the con- 
tinued popularity of the neighborhood or some defect 
may exist which might in time grow to be a more 
serious one, and when such shortcomings do not seem 
to be of sufficient importance to warrant the rejection 
of the loan, and at worst, can only operate to reduce 
and not to destroy the loan value, they may be prop- 
erly offset by reducing the amount loaned in pro- 
portion to the importance of the fault. But cures for 
such defects should not be sought through the unwise 
remedies sometimes resorted to — of the borrower 
agreeing to make future reductions in his loan, or of 
the lender reviewing the fact from a more optimistic 
point of view than he at first thought to be right and 
then making more liberal decisions. 



XV 



CONTRACTS AS TO TIME OF MATURITY 

Time is also a necessary feature of all loan con- 
tracts, and the investor or lender will find, as in the 
rule governing the amount loaned, that his own wishes 
cannot always arbitrarily determine the policy which 
he adopts ; he should, of course, consult his own inter- 
ests, but in doing so he must also give consideration to 
certain loan conditions with which he will be con- 
fronted. 

All Real Estate mortgages for whatever time they 
may be drawn are properly classed as "long time" 
loans, and they are seldom made for a shorter period 
than three years nor for a longer one than ten years ; 
the usual term being either five, seven or ten years, 
shorter terms than three years being favored in locali- 
ties and on securities where there is some doubt as to 
the permanency of values, and the ten year terms in 
sections and on properties about which no such doubt 
exists. 

The question of what is the most desirable length 
of time for which mortgages should run is also some- 
what involved with the question of their terms, for 
while their full amount is sometimes made to run 
for the full time, the contract is often modified by 
required or privileged prepayment conditions. 

The cost of a loan to the borrower is also a matter 
89 



90 MORTGAGE LOAN VALUES 

of interest to the lender when considering the time for 
which it is to be drawn, for although neither of these 
things can be expected to control the other, there is a 
relation between them which, in justice to the bor- 
rower, should be recognized within the bounds of 
safety. 

The actual time consumed and expense incurred 
may, for instance, be as great or even greater in the 
case of a small loan as it is in that of a larger one, 
but as the service required in the latter case is usually 
the more valuable it is customary for tMs charge to 
be made upon a percentage basis with a compensating 
rule that a larger percentage shall be charged on the 
smaller transactions, but however the expense may be 
calculated and whatever form its payment may take, 
it adds its sum to the cost of the loan and for all prac- 
tical purposes may be treated as a part of the interest 
paid by the borrower. 

It is very evident then that, figured upon this 
basis, the expense charge grows proportionately 
smaller with each year that is added to the term of 
the loan and that if the term is too short such a 
charge may easily be heavier than would seem to be 
reasonable. For example, if the cost of procuring a 
five thousand dollar loan should be one hundred dol- 
lars it would add two per cent, to the interest if the 
term was one year, while it would only add one-fifth 
of one per cent, per annum to the interest on a ten 
year loan; and if, as is the case in some sections, the 
loans are small and the cost of doing business is great, 
the percentage charge on short term loans will neces- 
sarily be such a heavy one that they will be burdened 



MORTGAGE LOAN VALUES 91 

beyond reason, the only remedies being longer terms 
or the foolish one of cheapened investigations. 

As a general rule the borrower is anxious that his 
loan shall be written for a long period, provided he is 
given liberal prepayment privileges, and as the in- 
vestor naturally wishes to avoid the trouble and loss 
incident to the frequent reinvestment of his funds he 
is nearly always willing to concede as long a term as 
is consistent with the safety of his interests. 

In other words, the borrower realizes that he may 
need the use of at least a part of the money for a 
comparatively long time and does not wish to place 
himself in a position where he may be compelled to 
repay the full amount before a time when he is sure 
that it will be convenient for him to do so, but he does 
want a contract that will allow him to repay it in 
part or in whole before maturity if such repayment 
becomes practicable and desirable to him; and it has 
become a common practice of investors to consent to 
longer terms and to grant some form of such options. 

On the other hand, it is said with reason by those 
who do not favor long terms that expert judges of 
loan values are usually able to foresee with reasonable 
certainty the probability or improbability of any oc- 
currence in the near future which may affect the 
value of the security, but that as the time is extended 
their ability to forecast its events rapidly diminishes 
and soon becomes negligible, and if long terms are 
granted there is ordinarily a greater danger that the 
securities may become impaired before the maturity 
of the loans than is the case if they are made for 
shorter terms. 



92 MORTGAGE LOAN VALUES 

It is also said that while the effect of ordinary 
changes in the physical surroundings of property is 
not apt to be immediate and if the property itself is 
in a good condition at the time the loan is made, it 
will usually be able to withstand neglect or misman- 
agement for a reasonable length of time without 
serious loss. It is also true that favorable hazards, 
especially personal hazards, may be changed at any 
time, and that when any unfavorable conditions do 
come into existence and reach a stage where their 
effect becomes marked, the depreciation in the loan 
value from that time on is nearly always a very rapid 
one. 

And again, it is urged that the long term contract 
binds the investor, while under the common plan of 
granting prepayment privileges it does not so bind 
the borrower, who, if prevailing interest rates should 
be lowered, can take advantage under such option to 
secure a lower rate by refunding his loan, but if inter- 
est rates should advance the investor has no corre- 
sponding opportunity to profit by that fact. 

These points seem to be well taken, and therefore, 
while investors may desire, they very generally fear 
long terms, and stipulations for required prepayments 
and amortization plans are sometimes used for the 
purpose of extending the time for the final payment of 
the whole loan and at the same time modifying the 
length of its term as applied to its full amount, in 
the belief that this plan will harmonize the interests 
at stake as shown by the various arguments for and 
against the policy of granting either very long or very 
short loan terms. 



MORTGAGE LOAN VALUES 93 

Theoretically, this amortization plan is a very at- 
tractive one, for with each payment that is made npon 
the principal the security is bettered, and for a cer- 
tain class of loans, especially loans on city property 
yielding a fixed and dependable income sufficient to 
meet the required payments, such plans are often 
found to be not only practical but also very desirable ; 
but for certain other classes of securities, especially 
the ordinary farm loans, they are frequently either 
impractical or undesirable, and in all cases the plan 
contains one very dangerous feature in the fact that 
it inclines the lender to take a too optimistic view 
of the situation. 

It is the proper habit of the investor's or lender's 
mind to look into the future and to consider his secu- 
rity from that angle, and if the contract provides a 
promise for its betterment in the future he will almost 
unconsciously give a certain weight to that feature, 
when in fact it is only a promise and not entitled to 
any consideration whatever as bettering the security 
at the time when the loan is made. 
• Although there are exceptional cases when long 
terms with no required prepayments are unobjection- 
able because of a large margin of security in stable 
land values, and a good rate of interest without 
unduly liberal prepayment privilege, a majority of 
investors seem to have agreed that in the ordinary city 
and farm loan business the weight of the argument is 
against either extreme, and that a term of either five 
or seven years is the most generally satisfactory one, 
five years being preferred by the more conservative 
who very generally feel that if ten year terms are 



94 MORTGAGE LOAN VALUES 

granted, a substantial repayment should be required 
at the end of the five year period as this will afford 
the investor an opportunity to protect himself in a 
measure against the evils that sometimes attend long 
terms, and will be long enough to answer the more 
serious objections to very short ones. 

"When some such plan as the above is adopted the 
investor is afforded a needed opportunity to review 
the record of the loan, to re-examine the property, and 
to call in a part of the loan if there is occasion for do- 
ing so, or of granting either in whole or in part such 
extensions as may be asked, if the circumstances war- 
rant him in extending it. 

It is true that the need of the borrower is more 
frequently than otherwise for a longer period than 
five years, but if he maintains a good record for his 
loan he seldom finds it difficult to obtain its extension 
at a moderate cost which, if divided by five, seven or 
ten, as the case may be, and treated as an annual 
expense, will usually seem to be a trifling one. 



XVI 

CONTRACTS AS TO PREPAYMENTS, ETC. 

City loans are very common in which a large pro- 
portion of the value of the property is represented by 
perishable improvements that must necessarily depre- 
ciate with age, and in such cases the plan of requiring 
partial repayments to be made after one or two years. 
in sums that will offset any such depreciation and in 
sums that can be realized from the net income of the 
property, is no doubt a wise one, and one which should 
be applied to all reasonably large city loans which 
approach the limit of fifty per cent, of the value of 
the security. 

If moderately small city loans are considered, such 
as those on average priced dwellings, the probable 
future depreciation of the property should be dis- 
counted in the amount loaned, for if this is not done, 
and the required partial repayments to cover this 
depreciation rest upon the personal ability of the bor- 
rower, or upon the net revenues from the property 
when such revenues are not sufficient to justify the 
investor in looking after them, this repayment plan 
will often be a source of worry to the ordinary in- 
vestor. 

It is no doubt true that any plan requiring that 
prepayments be made is often of benefit to that class 
of borrowers who are inclined to use their money for 

95 



96 MORTGAGE LOAN VALUES 

other purposes unless compelled to apply it upon their 
debts, but the smaller loans in which this is a prom- 
inent feature belong almost exclusively to such 
financing as is done by Building and Loan and other 
similar institutions which can make their prepayment 
collections at such frequent intervals and in such 
small amounts that there is seldom any occasion for 
waiving or extending them. 

In the case of farm loans, however, there are at 
least two very good reasons why the required yearly 
curtailment plan is objectionable. 

First, while the farm may produce a very depend- 
able average annual revenue it cannot be depended 
upon to produce a fixed annual revenue. Too much 
depends upon seasons and conditions that are beyoud 
human control, nor may the bad effects of a disastrous 
year be wholly confined to a direct loss of revenue 
from the crop affected. 

For instance, if a farmer should meet with a total 
failure of his corn crop he may find added to his loss 
of expected revenue from this source the necessity of 
buying corn to feed his live stock, and if a prepay 
nient on his loan should fall due in a lean year he 
might be compelled to make sacrifices or to ask for its 
extension, although his security was above question. 

Second, a large number of the best farm applica- 
tions are made for the purpose of obtaining money 
to use in making improvements to the farm or its 
equipment, and as returns on such outlays cannot be 
expected for some time, the farmer may not. mean- 
while, be able to repay portions of his loan, although 
by its proper investment in barns, fences, ditching, 



MORTGAGE LOAN VALUES 97 

live stock, etc., he may have made himself much bet- 
ter able to pay it in full at maturity. Under such 
conditions, requests for waivers or extensions of credit 
are frequent and the lender is often compelled either 
to grant these requests or to foreclose his loan, neither 
of which actions was a part of his original expectation 
and neither of which is satisfactory to him from a 
business point of view. 

Farming lands are, of course, subject to deprecia- 
tion from neglect or mismanagement, but they are not 
subject to many of the other conditions which may 
depreciate city values; and when the betterment of 
farm loans is sought by requiring annual prepayments 
to be made it would seem i?o be chiefly from an igno- 
rance of their peculiarities or an attempt to strengthen 
those which may have some questionable feature in 
location, amount, character, length of term, stability 
of value, or personal hazard that casts a doubt upon 
their entire desirability. 

As has been stated, it is a very usual practice to 
make loan contracts in which an option is granted the 
borrower of repaying a part or all of his principal 
debt before its maturity and this is quite different in 
most of its effects from the above mentioned required 
prepayment plan. 

There is, of course, some difference in the terms of 
such options as granted by different lenders, owing 
to the difference of opinion among them as to whether 
a liberal or a restricted policy is better. 

Occasionally such privileges are granted without 
any restrictions whatever, or with the simple require- 
ment that prepayments, if made, shall be on interest 



98 MORTGAGE LOAN VALUES 

dates, thus opening a door to short term loans at 
times when they are difficult to obtain through other 
sources. On the other hand, some lenders refuse to 
grant such privilege for more than a stated amonnt 
each year, and sometimes they stipulate that no repay- 
ment shall be made with borrowed money, thus un- 
necessarily hampering the mortgagor in the conduct 
of his affairs. 

It may be said that there seems to be little reason 
or demand for the more liberal of these policies, and 
little, if any, benefit to be had from the very restricted 
ones : a middle course, however, has been found to be 
a desirable one ; for instance, some lenders have had 
a very satisfactory experience in granting borrowers 
the option of making any prepayments desired at 
interest dates after the loan has run for two years. 
and also to make such payments at any time prior to 
two years provided an amount equal to three months 
interest is paid for the privilege. 

Under some such a policy the investor may be pro- 
tected against loss because of idle funds or reinvest- 
ment expenses, and the borrower is better able to con- 
trol his affairs if he wishes to sell his property or to 
reduce his debt. 

Reasonably liberal prepayment privileges, are very 
much desired by the better class of borrowers, and 
especially by the farmers and such others as have 
few opportunities of making profitable temporary 
investments, for such an option furnishes them, in 
effect, with a Savings Bank that is absolutely sound, 
but they will seldom insist upon a degree of liberality 
that would be unfair to the investor. 



MORTGAGE LOAN VALUES 99 

Nor should the investor proceed upon the mistaken 
theory that no favors can be granted by him to bor- 
rowers without corresponding disadvantages to him- 
self, for he will gain some advantage in every case 
where the borrower avails himself of a reasonable pre- 
payment option; not because of any betterment that 
is made to the security by a reduction of the propor- 
tionate amount of the debt, for if the loan has been 
properly made the security will need no such better- 
ment, but because of a certain betterment to the moral 
hazard which cannot be shown by any enforced pre- 
payment. For instance, when voluntary prepayments 
have been made the investor may feel more assured 
that he will have no trouble because of defaulted 
interest, taxes, or insurance, that the ultimate neces- 
sity of a foreclosure has grown more remote, that the 
value of the property is not likely to depreciate from 
want of care and attention and that the borrower is, 
to some degree at least, prosperous and a good per- 
sonal risk; while the required partial prepayment 
may have been met by the sale of stock or produce 
before it was ready for the best market, or by delaying 
needed repairs to the buildings or fences. 

As a matter of course prepayment privileges in- 
crease the mortality of loans, and equally as a matter 
of course, the increase from this cause is greater dur- 
ing a period when interest rates are being lowered, 
and less during a period when they are advancing; 
it is also greater in the better class of loans and lower 
in the ordinary or poorer class, and, as has been noted 
in another connection, the activity or depression of 



100 MORTGAGE LOAN VALUES 

the Real Estate market also seems to affect it to some 
extent. 

On the whole, however, the prepayment of loans is 
less than is often feared by the inexperienced investor 
who is contemplating the granting of snch privileges, 
but what it will be cannot be estimated in advance 
with any degree of certainty unless all of the condi- 
tions as to territory, character of securities, and the 
terms of contract affecting a given collection of loans 
could be assembled, and then only as it would be indi- 
cated by some former experience under similar con- 
ditions. A general idea, however, may perhaps be 
formed from the fact that under fairly liberal prepay- 
ment options, and no prepayment requirements, sev- 
eral millions of dollars in medium sized high class 
loans, that are about equally divided between farm 
and city loans and are located in about twenty dif- 
ferent States, have shown an average increase in 
mortality of about ten per cent. — that is, the average 
life of a five year loan according to this experience 
has been about four and one-half years when the 
final repayment of the principal has not been ex- 
tended beyond the original period. 

This increase in mortality, however, only shows the 
comparative effect of such prepayment privileges, 
for the actual average life of five year loans with 
their extensions is always much longer than five 
years, notwithstanding the fact that prepayment 
privileges have been granted. 



XVII 

CONTRACTS AS TO INTEREST RATES, ETC. 

The rate of interest that is to be paid by the bor- 
rower is also a necessary part of the loan contract 
and, next to the amount loaned, is probably the most 
important one. 

Preliminary to completing the loan contract with 
the borrower, the lender determines upon and asks 
for a rate which he believes the condition of the local 
money market will entitle him to receive and which 
will make the loan a marketable one, and the appli- 
cant usually agrees to pay such rate provided that 
the security which he has to offer will not afford him 
better terms from other sources. 

The investor very naturally desires to obtain as 
high a rate as possible and at the same time to main- 
tain the safety of his invested capital and will always 
attempt to accomplish both of these objects although 
in practice he will almost unavoidably make one of 
them in some degree secondary to the other. 

His business and that of the lender must, of course, 
show reasonable profits but if his primary purpose is 
safety rather than profit, his inclination is to make 
his rate demand as low as may be necessary in order 
to obtain the choicest securities and the main question 
with him is not then so much the question of larger 
or smaller profits as it is that of more or less desirable 

101 



102 MORTGAGE LOAN VALUES 

securities. If, on the other hand, he is especially im- 
pressed by the importance of higher rates he will be 
inclined to demand as high a one as seems to him to 
be obtainable on good securities, and the main ques- 
tion will cease to be the unquestionable desirability 
of the loans and rest more upon the rate that is obtain- 
able on those which may appear to him to be safe. 

This difference between the maximum and the 
minimum rate asked, as such demand may be influ- 
enced by the above views, is usually that of one per 
cent, of interest, but it is sometimes more or less than 
this if the investor holds extreme views as to the 
greater or lesser importance of one of his objects. 

The rental value of money on mortgage securities 
in any territory primarily depends, as does the price 
of commodities, upon its supply compared with the 
demand that there may be for its use. the demand 
generally representing some form or degree of Real 
Estate development or the refunding of old loans, and 
the supply of money for this purpose usually being 
more or less plentiful according to the known stability 
of Real Estate values in that section. 

These local rates also vary somewhat in each section 
owing to the relative desirability and size of the loans 
offered, the minimum rate being granted to large or 
medium sized loans on the best class of property with 
wide margins of security and desirable personal haz- 
ards, and a higher rate being charged when any of 
these features are not so attractive. 

The factor of time also enters into the question of 
local rates and as the shorter term mortgage loans 
are not so generally attractive to investors they often 



MORTGAGE LOAN VALUES 103 

command a somewhat higher rate than do those that 
rnn for a longer period, such mortgages being fre- 
quently taken by local banks, not as investments, but 
for the purpose of strengthening weak personal haz- 
ards. 

It must not be understood, however, that these com- 
ments on interest rates are intended to extend in any 
manner to that class of loans commonly known as 
"short time" loans, for these are usually based upon 
the pledging of stocks, bonds, chattels or personal 
obligations. They are usually made with funds the 
owners of which desire to turn frequently or to keep 
as nearly as possible available for other uses, and 
they usually command rates which are very sensitive 
to changing conditions for the reason that this is 
also true of the market for the securities upon which 
they are made, and there is no occasion for mention- 
ing this class of loans here except for the purpose of 
calling attention to the fact that the rates which they 
command are based upon a different set of facts than 
those upon which mortgage investment rates are based 
and for the reason that investors sometimes make the 
mistake of supposing that the reported rate in a given 
locality is necessarily the rate at which high class 
Real Estate loans can be made. 

This discussion, on the contrary, is intended to be 
confined to interest rates upon the ordinary Real 
Estate loans which are made wholly and exclusively 
upon the security afforded by first mortgages on the 
classes of property wmich have been mentioned as 
being the most generally desirable for that purpose; 
and these loans, being made with funds the owners 



104 MORTGAGE LOAN VALUES 

of which desire to keep invested as permanently as 
possible, and being based upon values that are believed 
to be very stable, are written at rates which are not 
inclined to yield except under strong or long continued 
pressure ; the non-liquid character of the loans tending 
to keep the rate up, while the stability of the security 
tends to keep it down; thus any variation from the 
standard rate on such mortgages in any locality is apt 
to be due chiefly to differences in the desirability of 
the individual loans. 

A very common as well as a very serious mistake 
which inexperienced investors make is in demanding 
a higher rate than the one that is generally accepted 
on the standard securities of the territory, for such a 
demand always tends to drive away the better class of 
borrowers who can get accommodations elsewhere and 
serves to attract the less desirable class who find it 
difficult to get accommodated anywhere. 

Such mistakes are often made by those who have 
no wish for undue profits at the expense of safety, 
but who have been misled by quotations of the rates 
obtainable in sections where they are not personally 
well posted as to the facts. The statement that a 
certain rate of interest is paid by the borrowers in a 
given territory may be, and indeed often is, accepted 
by them at its face value and, in a sense, the statement 
may be correct, but from a practical loan point of 
view the security itself needs to be explained; the 
territory may have faults which prevent its considera- 
tion on ordinary terms by other investors, the rates 
which are quoted may be those which are paid only 



MORTGAGE LOAN VALUES 105 

on the more undesirable loans or they may even be 
the rates charged for short time loans. 

While investors in Real Estate loans very generally 
wish to confine their business to standard s?eurities 
at the best rate which they can obtain, they will oc- 
casionally go into a section at a lower rate than has 
been customary there, with the idea that by so doing 
they can promptly secure a large share of the busi- 
ness of that territory, but in practice this plan seldom 
works satisfactorily, for the Real Estate loan busi- 
ness cannot be stimulated to any extent by lowering 
interest rates, and if other lenders meet the com- 
petition, which they are very apt to do, the cut-rate 
investor soon finds himself with no more and no 
better business than he might have had at the regular 
rate; for if he can establish a reputation for prompt 
action, fair dealing, favorable terms, and reasonable 
expense charges, such reputation will usually enable 
him to get and hold a good amount and good class of 
business at the full standard rate. 

On the other hand, investors sometimes hold to 
the opinion that the obtainable rate is largely a mat- 
ter of the asking, but this view is as far wrong as is 
the one that would expect to create business by low- 
ering rates that are already reasonable and competi- 
tive ; and an attempt to force either idea into the loan 
business will only end in disappointment. 

The better class of borrowers, even the farmers who 
are remote from money centers, are usually as well 
informed as to the current rates of interest in their 
localities as they are on the market price of any com- 



106 MORTGAGE LOAN VALUES 

modities which they may desire either to buy or sell, 
and with few exceptions the price paid by them for 
the use of money will be found to indicate the true 
loan value of their securities as surely as that the 
price paid for the purchase of property indicates its 
market value. 

There are sometimes exceptions to this rule but 
when one is found it suggests the possibility of unde- 
sirable conditions existing along other lines, such, for 
instance, as the personal hazard, and for this reason 
these cases should be given a very careful scrutiny 
before they are accepted as genuine exceptions. 



XVIII 

MODERATION IN THE DEMANDS OF THE MORTGAGEES 

Certain facts, which counsel moderation in interest 
demands, lie upon the surface and are patent to all 
investors and lenders. 

It is true, for instance, that a section of territory 
which measures up to a high standard of excellence 
from a loan point of view usually enjoys a low interest 
rate and vice versa. 

It is true that the minimum local rate, whatever 
that rate may be in any given territory, applies to 
such individual offerings as measure up to a certain 
required standard, and that those which do not so 
measure up pay a higher rate. 

It is true that a fairly large number of the obtain- 
able loans in any locality will be classed as undesir- 
able by any expert in such matters and will not be 
wanted by the more conservative investors. 

There is another fact, however, which is as true and 
as well known but which, unfortunately for the inex- 
perienced investor, contains a suggestion of profits to 
be made by waiving the more conservative rules ; it is 
the fact that many loan offerings may not be classed 
as wholly satisfactory but, nevertheless, cannot be said 
to be affirmatively bad, and that a seasoned investor 
by a wise and careful selection of such securities may 
be able to stay within the bounds of safety on the 

107 



108 MORTGAGE LOAN VALUES 

limited number of these loans to which lie can give a 
close personal investigation. 

It is safe to say that few, if any, investors ever pur- 
posely allow their desire for larger profits to carry 
them beyond the limits of safety in selecting their 
securities, but it is also true that many, who are influ- 
enced by the above mentioned fact, unintentionally do 
so. There is no lack of arguments by which the un- 
wary and inexperienced investor who has too much 
confidence in his own ability to discover exceptions to 
the general rules, or the greedy one who looks with too 
much favor upon high interest rates, is enabled to 
convince himself that he can ignore the more conserva- 
tive rules of lending without danger of loss. 

The poorer class of loans will not only yield a 
higher rate of interest to the investor but they will 
also pay more liberal commissions to the agent who 
negotiates them, and for this reason every ' ' doubtful ' ' 
section where the people wish to borrow money, and 
every questionable loan from whatever section it may 
come, may be expected to have enthusiastic advocates 
who will declare it to be as good as any and who will 
enlarge upon every favorable feature it may have and 
will depreciate every objectionable one. 

Cases will sometimes be presented, of course, which 
are so worthless from a loan point of view that no 
convincing argument can be offered in their favor, 
but if they are simply questionable cases they will 
often be supported so skillfully as to deceive the 
unwary and unseasoned investor, for any undue 
anxiety on his part to secure a high interest rate 



MORTGAGE LOAN VALUES 109 

will encourage him to listen with a friendly ear to 
such advocacy. 

The investor sometimes refers with pride to the fact 
that he has secured higher rates than have his com- 
petitors, but this is apt to be more a matter for con- 
cern than for congratulation. While there are oc- 
casions, such as the temporary withdrawal of invest- 
ment funds because of some general disturbance of 
ordinary conditions, when he can favor his interest 
receipts without treading upon dangerous ground, it 
may be accepted as a sound conclusion that, in the 
regular course of the business and under normal con- 
ditions, he who finds a rate which is above the market 
or who imposes harsh terms or heavy expense charges 
and commissions in an effort to increase his earnings 
will get, on the whole, a poorer class of offerings than 
will the person who is content with more moderate 
profits and who is willing to grant more favorable 
terms. 

A case in point occurred when a certain small insur- 
ance company, desiring to liquidate, offered to sell 
their mortgage securities; these were about sixty in 
number and one hundred and forty thousand dollars 
in aggregate amount (running fairly even as to the 
individual amounts), approximately two-thirds of 
these loans had been written at the then standard rate 
of five per cent, and the others at five and one-half 
and six per cent, rates. In order to induce purchasers 
the company offered to sell all or any of them on a 
six per cent, basis. 

A buyer had the Real Estate examined by three 
competent appraisers; these appraisers were told 



110 MORTGAGE LOAN VALUES 

nothing and knew nothing as to the amount, rate or 
terms of any of the loans ; their valuations were favor- 
able as to approximately eighty per cent, and unfavor- 
able as to twenty per cent, of the securities, and a 
further examination of their report showed that prac- 
tically all of those which had been written at five per 
cent, had been recommended and that over half of 
those which had been written at a higher rate had 
been rejected; thus showing that the lending com- 
pany, while securing an average of about one-fourth 
of one per cent above the standard rate on the whole 
amount of their investments, had acquired twenty 
per cent of unsalable (although perhaps not positively 
bad) securities. 

It is not an uncommon failing, though few will 
acknowledge it as their own, to seize the immediate 
advantage even at a risk to the ultimate object, and 
the evil of this tendency when allowed to find place 
in the investment business is great, because in many 
cases no loss will occur and in each case where no 
loss occurs there is encouragement for further liber- 
ality. The inclination to overvalue good qualities and 
to minimize defects grows ; after each fortunate expe- 
rience, real loan faults seem to be of a less serious 
nature ; and, when they are contingent on future hap- 
penings, such happening in the particular case under 
consideration seems to be unlikely, although expe- 
rience may show that in the average case its occur- 
rence is probable. 

In this attitude of mind the investor is apt to 
accept promises of future betterments without ques- 
tion, and to conclude that under ordinary circum- 



MORTGAGE LOAN VALUES 111 

stances a loss would be improbable, that in any event 
it would be inconsiderable, and that a small loss, if 
it should occur in one loan, -would be more than offset 
by the excess of interest received on many. 

Somewhere along the above line of action and argu- 
ment he, of course, leaves the field of investment and 
enters the field of speculation, and if he suffers no 
losses he soon becomes confirmed in these views and 
regards himself as an expert judge of such invest- 
ments. His doubts come later when he attempts more 
extensive operations, for he then begins to realize 
more clearly that yielding to the temptations of more 
than ordinary profits most certainly means a depar- 
ture from the more reliable class of securities. He 
finds the maintenance of an interest rate which is 
above the market to be a difficult and dangerous un- 
dertaking, bringing him into contact with more doubt- 
ful loans, more faulty titles, more objectionable moral 
and personal hazards, more misrepresentations of 
facts and concealment of adverse conditions than 
would otherwise be the case ; and he finds that he who 
is able to steer his financial boat clear of these rocks 
must not only be very clever indeed but must also be 
very fortunate if he escapes loss. But even though 
he should accomplish this, he finds that his gross ad- 
vantage is materially lessened because the excess in 
interest must be charged with the cost of an increased 
number of fruitless investigations and with the loss of 
interest suffered by reason of funds lying idle for 
want of sufficient satisfactory securities at the higher 
rate. 



XIX 

MINOR MATTERS OF LOAN CONTRACTS 

There are certain other matters which will become 
parts of the loan contract when it is made, and, 
although in a way they are of minor importance, their 
careful consideration is, in no sense, unimportant, for 
there will be occasions when the interests of the parties 
will be affected by the policies which are adopted con- 
cerning them. 

One of these matters relates to the payment of inter- 
est, the question being whether it should be made 
payable annually or semi-annually and whether its 
due date should be arbitrarily fixed or should be al- 
lowed to follow the date of the loan. 

The proper answer to each part of this question 
seems to be based upon the same principle — i. e., that 
the ordinary income from the property should be 
expected to meet the interest charges when due. 

The avoidance of defaults is the main object to be 
sought for, and it will be found that this can be better 
accomplished under certain conditions by adopting a 
rule requiring semi-annual payments and under other 
conditions by a rule requiring annual payments. 

On city loans generally and on farm loans in sec- 
tions where crops are diversified and marketable 
throughout the year, semi-annual interest is prefer- 
able, for aside from affording the investor a slightly 

112 



MORTGAGE LOAN VALUES 113 

better return in the difference between the nominal 
and the effective rate, it also enables him to keep in a 
closer touch with his interest collections and with any 
changing conditions in the moral hazard. 

When the income from the property is a steady one 
it makes little difference to the borrower when his 
interest payments may become due, but it is usually 
easier for him to meet semi-annual payments because 
they are smaller, and in such cases there are, without 
doubt, fewer defaults under a rule requiring them to 
be so made. 

On the other hand, in those cases where the income 
from the mortgaged property is an annual one, such 
as a farm from which the principal ' ' money crop ' ' is 
marketed but once a year, the requirement of semi- 
annual interest payments will often work a hardship 
upon the borrower and will frequently be the cause 
of defaults, for the reason that at least one of the 
interest due dates will come at a time when there is 
no income from the property with which to meet it, 
and probably also at the time of the borrower's great- 
est expense in conducting his business. 

Accommodating the date of the borrower's interest 
payments to the date of his income receipts will there- 
fore lessen the danger of defaults, and in those cases 
where the income is an annual one it is also perhaps 
the best practice to fix an arbitrary interest due 
date to come at the most promising time for its prompt 
payment, although this will of course make it neces- 
sary in many instances to vary from a strict uniform- 
ity in the time and amounts of the interest coupons. 

It would seem then that the interests of neither the 



114 MORTGAGE LOAN VALUES 

investor nor the borrower will be served by the adop 
tion of a fixed rule to be applied in all cases, bnt that 
the interests of both will be served by a rule that in 
each case the requirements shall be made to fit the 
conditions. 



Another matter which may become a part of the 
loan contract and should be previously considered is 
that of fire insurance. 

If buildings are a part of the Real Estate mort- 
gaged and are insurable, it is always desirable, as 
bettering the moral hazard, that they should be kept 
insured whether or not the land value alone is suffi- 
cient to cover the physical hazard. 

If, however, the land value is not sufficient in 
itself for the protection of the mortgagee and the 
buildings thereon are taken as a part of the physical 
security, it is not only desirable but is then very 
necessary that they should be kept insured during the 
life of the loan in a proper amount, written by a 
responsible company, and that the policy should be 
assigned to the mortgagee "as his interest may 
appear," and it is usual in such cases for the loan 
contract to provide for this. 

The main questions to be decided in this matter are 
first as to the amount of insurance which should be 
demanded, and second, as to what rule should govern 
the acceptability of insurance companies. 

As to the first of these questions, the only matter 
that can be profitably considered here is how to de- 
termine what is the minimum amount which the mort- 



MORTGAGE LOAN VALUES 115 

gagee can in any case accept with safety ; and the best 
rule for determining this seems to be that it shonld 
be in a sum that is at least equal to the amount of 
the loan less one-half of the ground value. 

When this rule is adopted it will be evident that if 
there is a loss and the insurance is collected and 
applied in reducing the debt, the remaining unpaid 
portion (aside from defaults) will be equal to only 
one-half of the value of the remaining security, and 
the loan will still be within the fifty per cent rule. 

As to the question of the acceptability of the insur- 
ance companies, it may be said that the mortgagee 
will, of course, very properly insist that they shall 
be financially sound and of a good reputation for 
fair dealing. He will usually require that they shall 
be regular stock companies and will object to mutual 
or local assessment companies on the ground that they 
are generally of inferior financial standing and incon- 
venient to keep in touch with and that the validity of 
the assignments of their policies without the assignee 
incurring a contingent liability is also often open to 
question. 

Lenders sometimes act as the agents for insurance 
companies and are then tempted to adopt the ques- 
tionable practice of demanding, instead of soliciting, 
the business of writing the necessary policies for their 
borrowers. 

From a loan point of view this practice seems to 
be faulty inasmuch as it tends to create an unfriendly 
feeling in those borrowers who believe that they have 
a right to place their insurance elsewhere and have 
good reasons for desiring to do so. They are willing 



116 MORTGAGE LOAN VALUES 

to do whatever may be necessary in order to make 
their security good, but they know that there are 
many companies against which no legitimate objec- 
tions can be urged and whose policies would afford as 
full protection to the mortgagee as would those of his 
own agency, and they regard his action as that of 
going outside of any just requirements for the pur- 
pose of securing a little extra profit on the side. 

Other matters which are commonly made parts of 
the loan agreement, such as the borrower's liability 
for certain agreed expenses, his obligation to furnish 
a satisfactory abstract of title with its necessary con- 
tinuations, and to furnish evidence from time to time 
during the life of the loan of the payment of taxes and 
other liens having priority rights, require no special 
comment and may be dismissed with the remark that 
their terms, as well as those of all other agreements, 
should be reasonable, well understood and clearly 
stated in the contract. 



XX 

QUALIFICATIONS OF INSPECTORS 

When an application for a loan upon Real Estate 
is submitted to a lender or investor and is found to 
comply with Iris requirements as to the various matters 
which have been referred to in these comments, there 
will still remain two most vital questions which must 
be fully investigated by some competent person in 
his behalf before he can reach an intelligent final 
decision for or against making any loan. 

One of these questions relates to the actual value 
of the property for mortgage loan purposes, and the 
other to the legal value of the title in the applicant for 
such purposes, for it must be remembered that 
although the present market value of the Real Estate 
may exceed an amount necessary to justify the loan, 
it may nevertheless lack dependable evidence of stabil- 
ity, and that while the applicant may have a good 
prescriptive title that will enable him to hold the 
property in his possession, such title may not be suf- 
ficient of record to insure the safety of a mortgagee 's 
interests. 

It is customary for the loan value of the Real Estate 
to be determined in advance of the title investigation, 
the main reasons being that findings as to loan values 
are apt to be based upon a greater variety of facts 
than are findings as to title values and that any faults 

117 




UNBALANCED VALUES 



118 



MORTGAGE LOAN VALUES 119 

which may be found in the physical security are less 
likely to be curable ones. 

The question as to whom this work of determining 
loan values shall be intrusted is a matter of grave 
concern to the investor. This person should, of 
course, be both honest and competent, but his qualifi- 
cations should go beyond what is embraced in the 
ordinary use of these terms ; his honesty should he of 
that quality which extends to an absolute thorough- 
ness in his work and his competency should includg 
a knowledge of all of the conditions which make and 
maintain values in the class of property and the terri- 
tory that are to be investigated. 

It would be useless to attempt to enumerate the 
various things which the inspector should know in 
order to be efficient in his work, for not only the class 
of property, but the territory will have its special 
requirements in these matters. 

It may be said, however, that in all cases his knowl- 
edge should cover a wide range of facts that it 
should be dependable and that above all else it should 
be of a practical nature. 

He should, for instance, understand the use and 
importance of the public records and approved plats 
in the work of locating and identifying property. 

He should have a fair idea of the approximate cost 
of each of the various kinds of construction, of its 
yearly depreciation and its yearly cost for mainte- 
nance, of its suitability to its location and the proper 
balance between its ground and its building values. 

He should have a good eye for details, and an ap- 
preciation of their relative importance and of their 



120 MORTGAGE LOAN VALUES 

relation to the principal questions under considera- 
tion. 

His information does not necessarily need to be so 
complete as to qualify him as an expert in each and 
every minor matter, but it should be sufficient in 
these minor matters to enable him to avoid any serious 
mistakes in the main matters of which they are parts. 
For example, he may not have a working knowledge 
of any of the building trades, but in examining a city 
building of which any one can see the size, material, 
style, and equipment, the competent inspector will also 
see those little things which, although each is a com- 
paratively small part of the whole, tell the true story 
of the general character of the construction, and 
especially of those parts which are hidden. His 
trained eye will not only observe the completed build- 
ing but will also take note of its window glass, its 
hardware, its painting, its plumbing, its floors, its 
finish, its foundation, and its roof, and perhaps many 
other things which will indicate its relative cost and 
character, and, knowing something about each of 
these things, he will not be open to any considerable 
deception as to the cost of the whole and will be able 
to serve the mortgagee as well as if he possessed the 
skill of an expert builder. 

Neither is it necessary that the farm inspector 
should be a soil expert. 

In surveys which cover less than one-fifth of the 
total agricultural area of the United States there have 
been found to be more than seven hundred different 
types of soil and for the farm inspector to attempt a 
detailed study of them would be impractical. 



MORTGAGE LOAN VALUES 121 

But there are many tilings about the soil that he 
must know; he must be able to read the signs of its 
fertility as shown by its color and texture and normal 
water content and by its native growth of trees and 
grasses. 

He will not neglect to note its workable qualities, its 
sub-soil, its drainage, its topography, its tendency to 
erosions, its liability to overflows, and its present 
state of cultivation, and will be able to arrive at very 
correct, practical conclusions as to its agricultural 
value although he may be unable to classify it by its 
finer distinctions. 

He should be able to distinguish between profitable 
and unprofitable methods of farming, and should 
know something about the conservation of the soil and 
of practical methods of reclaiming worn lands, for 
otherwise he will often be unable to judge intelligently 
of the likelihood of future improvement or deprecia- 
tion. 

He should know something about the systems of 
land measurements and divisions in use in the terri- 
tory in which his inspections are made, and it is es- 
pecially important that he should have a good eye for 
distances and be able to estimate areas with approx- 
imate accuracy. 

If he makes inspections in a section where the soil 
is liable to erosions, he should be able to judge of the 
efficacy of the terracing and other methods of preven- 
tion which may be used. 

In an irrigated section he should understand the 
different ways of measuring water and the approxi- 



122 MORTGAGE LOAN VALUES 

mate amounts needed for agricultural purposes under 
the various soil and crop conditions. 

In a "one crop" section lie should understand the 
evil effect which this condition is apt to impose on 
the general market and be able to recognize intelligent 
neighborhood efforts to overcome it. 

The various things which the expert inspector will 
see and from which he Avill form his conclusions might 
perhaps be seen by any observant person but not seen 
so clearly nor understandingly, and to rely upon his 
deductions from those facts would be like giving an 
unskilled person a set of surveyor's instruments and 
expecting him to use them skillfully — he might get 
some things right but his work would be lacking in 
any dependable qualities. 



XXI 

DUTIES OF INSPECTORS 

Aside from questions of title and personal hazards, 
the loan value of Real property is based upon it's 
market value plus the stability of that value, and the 
various conditions that indicate such stability or 
instability are known under the general term of the 
moral hazard and form the crux of the mortgage loan 
business. 

The investor cannot expect to find, even in a limited 
class of securities and in a limited territory, that a 
state of facts of equal importance is co-existent in 
any considerable number of instances ; some shades of 
difference will always be observed and some points 
found to be favorable and some to be unfavorable in 
almost every offering, and it is the most important 
work of the inspector to dis3over and assemble these 
facts and to estimate them at their true worth as 
affecting the general moral hazard. 

Some of these hazards may be found to be affirma- 
tively good and some to be bad; these will trouble the 
expert very little, but there may be others which 
when viewed from one angle will seem to be good and 
when viewed from another angle contain an element 
of uncertainty that may be very perplexing. It is true 
that a single unfavorable fact is often conclusive in 
itself, but this is never true of the single favorable 

123 



124 MORTGAGE LOAN VALUES 

fact and in these cases where the hazard seems to be 
generally good although there is some cloud upon its 
excellence, favorable decisions should be withheld 
until all of the facts which may in any way affect the 
moral hazard have been very closely scrutinized. 

There are persons, of course, whose experience has 
been such as to qualify them to judge intelligently of 
both city and farm values, but as a rule the opinion 
of an inspector, no matter how capable he may be in 
one field, is not dependable in both, for, as has been 
pointed out, the conditions in these are widely differ- 
ent in many respects and the things that may be 
obvious to the expert in one line may be entirely over- 
looked by the expert in the other line. 

A most competent judge of farm loans may, for 
instance, be unable to see a "misfit" in a city build- 
ing and its location, or he may fail to detect evidences 
of stagnation in neighborhood values. On the other 
hand, a shrewd and practical city loan man seldom 
knows the surface indications of an unfavorable sub- 
soil and may easily be deceived by a brave showing of 
crops on land which could not produce them except 
under very unusual conditions, while each inspector 
in his own field would be able to see these things at a 
glance. 

The opinion of a farm expert is seldom sought in 
the matter of city values, and a majority of investors 
in such securities would no doubt consider it unwise 
to do so, but it does not seem to be unusual for an 
investor in farm mortgages to make the mistake 
(although the lender seldom does so) of depending 
upon the judgment of a city loan man in determining 



MORTGAGE LOAN VALUES 125 

farm values. They apparently regard the expert in 
city loans as an expert in all Real Estate loans 
although in fact his judgment as to certain features of 
farm securities is really more apt to be at fault than 
is that of the farm expert when attempting city valua- 
tions. 

The investigator is always at a disadvantage when 
attempting to do work outside of the lines to which 
he is accustomed, and this is especially true when the 
city man attempts the inspection of farms. When 
making city inspections he will find many disinter- 
ested persons among bankers, builders, money lenders 
and Real Estate dealers, the concensus of whose 
opinions is of value, but in the country he is without 
this aid, for those who know the facts will often 
hesitate to speak frankly to a stranger if doing so 
would be unfavorable to the locality or would be 
regarded as unfriendly by a neighbor. 

"While the neighborhood opinion as to the value of 
the property is always important, it is usually of 
more consequence in the case of a farm than of city 
property, for in such a case it will have more influ- 
ence on the salability of the property; and in this 
matter it is much more difficult for any one, and 
especially for the city man, to get candid and truthful 
expressions from those who are in a position to know 
than it is for almost any one to do so in city investiga- 
tions. This is not because of any local lack of knowl- 
edge, for the contrary is nearly always true, but it is 
because of greater suspicion of the stranger who does 
not "belong" and an appreciation of the fact that 



126 MORTGAGE LOAN VALUES 

more intimate neighborhood relations exist among 
country people. 

The farm expert, however, when examining farm 
lands, is able to learn many things without asking- 
questions, and when he finds it necessary to ask them, 
he knows how to do so in a way that will elicit much 
information which might and probably would be with- 
held if it were apparent that he did not understand 
his business. v\ nen examining farm securities, the 
city man who is inexperienced in that line soon real- 
izes that he is at a disadvantage and sometimes at- 
tempts to offset his limitations by pretending to a 
knowledge of the subject which he does not possess, 
but this only makes matters worse, as no attempt conld 
be more hopeless than this and the pretense only 
im'ites misinformation. 

Another important feature of the loan value is the 
actual average income value of the property, and 
in the case of city property this can usually be de- 
termined with considerable certainty by the simple 
method of comparing it with that of like property that 
is similarly located; but it will be found that by far 
the greater number of farms are either occupied by 
the owners or are rented on a share crop basis, and 
in these cases the inspector must be able, from his own 
knowledge of the farming business, to make an ap- 
proximate estimate of their average net earnings. 

These are merely a few examples in a long list that 
might be given of the special features belonging to 
each general class of securities, but they should be 
sufficient to cause the investor to pause before intrust- 
ing loan valuations to any except those who are 



MORTGAGE LOAN VALUES 127 

expert judges of the kind of property under con- 
sideration. 

The inspector's work should always be limited to 
the class of investigations with which he is most 
familiar, for in these he will be most practical and it 
is very important that his conclusions should be along 
practical rather than theoretical lines; and while 
certain rules as to valuations apply in all cases, each 
of the two general classes of property has practical 
features which are peculiar to itself and which must 
be taken into account in determining their loan 
values. 

It is sometimes thought that a farm inspector must 
certainly be competent if he has a theoretical knowl- 
edge of the modern or what are called "scientific" 
methods of farming, but, while such knowledge is no" 
doubt an asset, it can by no means be relied upon, 
because unless he can make his estimates of income on 
the basis of common ordinary farming methods and 
not allow potentialities to influence his judgment, he 
is apt to prove a failure, for the lender can only rely 
upon the ordinary methods being followed. 

It will also be apparent that the same principle 
applies to city loans, and that while it is desirable that 
the investigator should have a broad enough vision 
to see the future possibilities of the property and the 
locality, he should estimate the value of this feature 
as appreciating or depreciating the moral hazard 
only, and confine his estimates to actual values as he 
finds them to be based upon the current facts. 



XXII 

BUILDING COST ESTIMATES 

It is not to be expected, nor is it necessary, that the 
inspector who determines the loan value to be placed 
upon a building should have as exact knowledge of 
the cost of its construction as would be expected of a 
builder or contractor who might be asked to estimate 
the cost of its duplication. 

It is quite important, however, for the inspector to 
be able to estimate its approximate cost with reason- 
able certainty, for such cost very frequently affects 
and sometimes governs the price for which the prop- 
erty can be sold, although so many other elements 
enter into the question of its loan value that the 
amount of its original cost less its physical deprecia- 
tion may mean either much or little to the investor. 

Expensive construction and a good state of preser- 
vation, for example, may be offset by conditions that 
interfere with the salability of the property at a price 
which its cost might otherwise seem to justify, and 
the main question for the inspector to decide is not 
upon its physical value as based upon its original cost 
less its physical depreciation, but it is upon the loan 
value shown by its present market value as justified 
by the stability of that value. 

This is, of course, always the main question. It is 
true, however, that its consideration also usually 

128 



MORTGAGE LOAN VALUES 129 

involves that of the cost of the building and the char 
acter of its construction, and that in those cases 
where the proper equilibrium has been maintained 
between its cost and the market demand, such cost 
less the physical depreciation is usually balanced with 
its value for loan purposes, except in special purpose 
properties and those which conform to temporary 
"fads" in style or construction. 

A good class of material and workmanship in a 
building will go far towards indicating its greater 
ability to withstand depreciation from age and it thus 
enters into the moral hazard even when its additional 
cost does not warrant a corresponding increase in 
the loan value, and a ' ' cheapened ' ' building, although 
of good style and good present salability, must be 
discounted because of this fact. 

It is evident then that the inspector should not de- 
pend wholly upon what he may be able to learn as 
to the market value of the property but should have 
a good working knowledge of the approximate cost of 
the various kinds and classes of material and construc- 
tion, their average yearly per cent of depreciation 
from age and the ordinary cost of their maintenance. 
He should be able to recognize the different grades 
of material and workmanship and to detect any signs 
of cheapened construction and should be able to tell 
whether or not a proper equilibrium has been main- 
tained between the "show" parts and the less prom- 
inent parts of the building as well as between its entire 
cost and the value of the ground. 

Such knowledge can only be acquired by consider- 
able study and experience, for costs of material and 



130 MORTGAGE LOAN VALUES 

labor vary at different times and at different places, 
and such things as foundations, inside finish and 
built-in equipment in the way of elevators, heating- 
plants, etc., will considerably alter the cost of build- 
ings which have very much the same general appear- 
ance. 

If the inspector learns these things and keeps them 
in mind the following tables of approximate and rela- 
tive values, etc., may sometimes be of service to him, 
but he must learn to use them only in the way of 
general information, for this is their only dependable 
use. 

It is 'evident that two buildings of the same general 
style, construction and finish will, if built under the 
same labor and material conditions, cost about the 
same per cubic foot, notwithstanding the fact that 
they may differ somewhat in size and shape, and the 
following tables have been based upon what are be- 
lieved to be the average prices and average condi- 
tions and reasonably free from the abnormalities of 
unsettled times. 

It will be noted that there is considerable variation 
between the minimum and maximum estimates given 
in each case, and this makes the use of such tables 
impractical except for the purpose of showing the 
general facts; such variation, however, is unavoidable 
in tables which do not contemplate the exact duplica- 
tion of every detail. 

In these estimates calculations have been made from 
the floor of the cellar or basement to the roof in 
those cases where the roof is a flat one, and that 



MORTGAGE LOAN VALUES 131 

part above the eaves in which there is head room, in 
other cases. 

Open porches are not included in these figures and 
perhaps they can be best estimated upon a square 
foot basis which in frame construction will be about 
one dollar for very plain ones and from two to two 
and one-half dollars for more substantial ones. Brick 
or masonry construction will add about 30% to these 
figures. 

Cubic Foot Estimates on City and Town Property. 
(Add %c for slate or metal roofs) 

Dwellings — Frame, hardwood floors and fin- 
ish bath, furnace, laundry, good plumb- 
ing, 1st class throughout 13 to 15c 

Dwellings — Frame, part hardwood floors 
and finish, bath and furnace, good but 
inferior to above, ■ 10 to 12c 

Dwellings — Frame, plain but good, pine 

floors and finish, no bath or furnace,. ... 8 to 9c 

Dwellings — Brick, 1st class, 11 to 16c 

Dwellings — Brick, 2nd class, 11 to 13c 

Dwellings — Brick, 3rd class, 10 to 12c 

Large Brick or Stone Mansions — 

1st class, good and substantial, 40 to 53c 

Additions to same, 22 to 27c 

2nd class, less costly but good, 29 to 40c 

Additions to same, 20 to 27c 

Flats — Brick, stone or ornamental brick 
fronts, fire-proof throughout, with eleva- 
tors and all modern equipment, elabor- 
ately finished, 55 to 60c 



132 MORTGAGE LOAN VALUES 

Flats — Brick, some ornamentation, well fin- 
ished, with elevators, fire resisting floors, 
etc., good class, 37 to 48c 

Flats — Brick, ordinary class, plain but good, 

with elevators, ,28 to36c 

Flats — Brick, cheap class, no elevators, 20 to 27c 

Store Buildings — 2 to 4 stories, ordinary 
brick and timber, plain finish, no ele- 
vators, 12 to 15c 

Store and Office Buildings — Non-fireproof, 
complete with elevators and all necessary 
machinery, 23 to 31c 

Office Buildings — Fire-proof, complete in all 
respects, good but with plain finish, with 
elevators and heating plants, 32 to 55c 

Office Buildings — Fire-proof, steel frames, 
extra finish in all respects, cut granite 
in steel frames, etc., with elevators and 

heating plants, 55 to 80c 

(Office buildings have a wide range of cost 
owing chiefly to ornamentation and the 
elaborateness of finish, etc.) 

Warehouses — 4 to 7 stories, mill construction, 

brick walls, freight elevators, 13 to 16c 

Warehouses — 4 to 7 stories, fire-proof, extra 
heavy construction, elevators, brick walls, 
plain finish with good front, 20 to 25c 

Estimates for Buildings on Farms or in 
Small Villages. 

(A very great variation will also be found in the 
practical application of these estimates, chiefly be- 



MORTGAGE LOAN VALUES 133 

cause of the difference in the cost of placing the 

material npon the ground.) 

Dwellings — Frame, 1st class, good construc- 
tion and finish, ; 10 to 12c 

Dwellings — Frame, 2nd class, plain, painted. 

small cornice, good foundation, 7% to 9c 

Dwellings — Frame, 3rd class, box house, un- 

painted, no cornice, on blocks or piers, . AV 2 to 6? 

Dwellings — Brick, 1st class (as above), 12 to 14c 

Dwellings — Brick, 2nd class (as above), 10 to 12c 

Barns — Frame, 1st class, well finished, good 

foundation, painted, complete, 6 to 9c 

Barns — Frame, 2nd class but good con- 
struction, good foundation, painted, ...3% to 5e 

Barns — Frame, 3rd class, cheap, unpainted. 

on blocks or piers, 2 to 3%c 

Country Stores — Frame, ordinary, plain fin- 
ished, painted, good foundation, 7 to 9c 

Country Stores — Brick, well finished, paint- 
ed, good foundation, 11 to 13c 

The following table showing the depreciation of 
frame and brick buildings is said to be used by the 
United States Government : 

Table 
Brick when occupied by owner, 1 to 1%% per year 
Brick when occupied by tenant, 1*4 to 1%% per year 
Frame when occupied by owner, 2 to 2!/2% per year 
Frame when occupied by tenant, 2% to 3 % per year 

This rule contemplates a good grade of buildings 
on which ordinary repairs have been made, and it 



134 MORTGAGE LOAN VALUES 

should be varied as repairs have been more or less than 
ordinary. 

The physical depreciation according to 

other authorities is for cheap frame 

buildings, 10 to 15 year- 
Ordinary frame residences, 20 to 30 years 

Good class frame residences, 35 to 50 years 

Cheap brick buildings, 25 to 30 years 

Ordinary brick or stone buildings. 35 to 50 years 

Good brick or stone buildings, 50 to 75 years 

Best brick or stone buildings, 75 to 100 years 

The life of steel and concrete buildings is unknown. 

Such tables are of little value, however, for they 
are intended to show only the average physical depre- 
ciation of various classes of construction and there 
are many other causes for loss of value, some of 
which are almost if not quite as relentless as time. 
For example, the physical loss may be very low and 
the building may have had the best of care and there- 
fore may be especially well preserved, but the style of 
its architecture or of its inside arrangement or fit- 
tings may lose their popularity in a short time as 
they most certainly will do eventually, and when they 
do so the former sale values will no longer exist. 

In reaching conclusions as to the market value of 
a building the inspector will also find that the rela- 
tion which its physical value bears to the value of 
the ground upon which it stands is an important 
feature. 

As a general rule, he will find that, in order to be 
well balanced, ordinary residence and business prop- 



MORTGAGE LOAN VALUES 135 

erties should not have an initial cost of less than the 
value of the ground nor should they exceed three 
times this amount. Other properties, however, such 
as apartments, warehouses, hospitals, etc., which 
require rather expensive construction but do not need 
expensive locations, may exceed this and sometimes 
are not out of balance at five to six times the ground 
value, provided that they are also well suited to 
their location in other respects. 

This rule presupposes that in estimating city loan 
values only a suitable and necessary amount of ground 
will be considered; for instance, a house which would 
be suitably located on fifty feet frontage of land must 
not be balanced against the 150 or 200 on which it 
may stand, the vacant ground in such cases being very 
generally unproductive. 

The same principle applies to farm buildings, but 
the question here is on their suitability and physical 
value measured by the needs of the whole farm, for in 
this case it is the productiveness of the soil that gives 
to the ■ whole property its income value and in the 
other it is the housing needs of the people which makes 
the building itself do this. 

Another very important matter for the inspector of 
city buildings to consider is the cost of maintenance 
of various classes of property. This is necessary in 
order that he may be able to reach safe conclusions as 
to the net earnings upon which the loan value of any 
particular property should be based. 

This cost of maintenance will vary greatly, owing 
to the character, location and uses of the property, 



136 MORTGAGE LOAN VALUES 

but will probably follow a rule somewhat as indicated 
by the following : 

Table 

Ordinary store buildings about 10 to 15% of gross rent 
Cheap residences without 

plumbing 15 to 20% of gross rent 

Good residences 20 to 30 % of gross rent 

Ordinary office buildings 25 to 35% of gross rent 

High class office buildings . . .40 to 60% of gross rent 

Flats without elevators 35 to 45% of gross rent 

Flats with elevators 40 to 50% of gross rent; 

Service costs will be found to make up a large part 
of the difference between the higher and the lower 
class properties above listed. 

It will also be seen that the maintenance cost is 
proportionately less in the less expensive buildings, 
and if the gross rental affords the same interests rate 
in each case, the net interest earnings are less in the 
more expensive ones, and their owners must look to 
the enhancement of ground values and the longer life 
of the buildings, or, in other words, to more indirect 
results for their profits. 



XXIII 

PHYSICAL AND MORAL VALUES OF REAL ESTATE 
SECURITIES 

Ascertaining the market value of Real Estate is 
not always as simple a matter as many persons be- 
lieve it to be, although when the market for Real 
property in the neighborhood has been fairly but not 
unduly active upon ordinary cash terms, there will 
always be a basis for prompt conclusions. 

Any variation from these conditions will present 
problems which should be referred to no one except 
an expert for solution. The local Real Estate market 
for some reason may have been unduly active and 
may have shown recent rapid advances, on the other 
hand, its market may have been stagnated or sales 
made at falling prices, or what is more common, ask- 
ing prices may have been maintained but transfers 
only made under especially easy terms of payment or 
by exchanges of other property, and in any such cases 
its true value may be very difficult to determine. 

It has been held that the price for which Real 
Estate is sold without distress and bought without 
necessity fixes its value, but this, of course, presup- 
poses the price paid to be in cash or its equivalent. 
Theoretically this is a sound rule and one that should 
always be kept in mind and applied whenever pos- 
sible, for no other one fact will point so strongly to 

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MORTGAGE LOAN VALUES 139 

the true value, but in attempting its practical appli- 
cation to mortgage loan valuations, difficulties will 
often be encountered, because of the fact that in a 
majority of cases it will be found that neither the 
property offered nor any similar nearby properties 
have been recently bought and sold under those con- 
ditions. ? ^^IP) 

Where sales have been made without apparent dis- 
tress upon one hand or necessity upon the other, it 
will often be found that the seller has had such profit- 
able and immediate use for ready cash or the buyer 
such special use or fancy for the property as to induce 
the sale at either less or more than its real value, or 
it may be that the buyer's ignorance of real values, 
or his optimistic ideas of their future appreciation, or 
the exchange price of other property, or the ad- 
vantage of a small initial payment or of a long time 
granted upon deferred payments have entered into 
the transactions and thus affected the price. 

Evidences of the market value of property should 
first be sought by inquiries concerning recent trans- 
fers in that neighborhood and the conditions under 
which such transfers were made. Then, by reducing 
these conditions to a cash basis and comparing the 
marketable qualities of the property which has been 
sold with those of the property Avhich is under investi- 
gation, the inspector may reach approximately true 
conclusions, provided that the local Real Estate mar- 
ket is a normal one. 

In cases where it is found that no nearby property 
has been recently sold inquiry should be made as to 
what offers, if any, have been made and refused, and 



140 MORTGAGE LOAN VALUES 

if no offers have been made, then it should be ascer- 
tained what price, in the opinion of nearby owners or 
agents, could be secured and upon what terms: and 
these figures should then be checked against the pres- 
ent and potential income value of the property for 
ordinary and legitimate uses, taking into account its 
present condition and state of repair. 

Efforts are often made to induce an inspector to 
give weight to very insufficient arguments and incon- 
clusive facts. It is sometimes the foolish practice of 
agents and owners in those sections where there has 
been little activity in Real Estate to avoid the prac- 
tical question of the price at which buyers for the 
property could be procured, and to seek to convey the 
information wanted by stating a price at which in 
their opinion neighboring properties could not be 
bought, which is no answer to the question at issue and 
imposes on none except the inexperienced. Assess- 
ments for taxation are so different in different places 
and under different systems that they are of little 
value except as they may put the investor on inquiry 
in those cases where they seem to be unreasonable: 
rumored sale prices and even considerations recited 
in deeds should always be accepted with caution and 
large gross incomes should never blind the inspector 
to the fact that it is only the net income which counts. 

Arriving at safe conclusions in the matter of the 
moral hazard is sometimes difficult, more often and 
more especially so in the case of city loans, for these 
are much more dependent upon changing conditions 
than are farm loans; in these offerings the city itself 
must be first considered, its size and location, its 



MORTGAGE LOAN VALUES 141 

transportation facilities, the character and diversity 
of the industries from which it draws its support, its 
nearby rivals, and its general prosperity. 

The general location of the property in the city 
must then be considered, whether or not such loca- 
tion is within the lines of the city's advancement and 
well within the limits of established values, its liability 
to heavy assessments for special improvements, its 
vacancies and their causes, and, in fact, all of the sur- 
rounding conditions which may indicate the probable 
permanency of the present market values, this being 
an essential feature of the loan value sought to be 
ascertained. 

When the property itself is reached in this investi- 
gation, it must be measured by the requirements of 
its surroundings, it must be found to fit its location 
and uses, its style and construction should be such 
that it will not greatly depreciate during the life of 
the proposed loan, and, except when the money is 
borrowed for the purpose of its improvement, its 
present condition must be good. 

The value of the ground should be in a fair pro- 
portion to the value of the entire property, its rental 
value for ordinary and lawful purposes should justify 
its loan valuation, and, if the improvements are 
designed for special uses, they should also be available 
for other purposes, unless the ground value alone will 
fully warrant the loan. 

As to the stability attending farm values the situa- 
tion is not nearly so complicated, and when the value 
of the buildings does not exceed the amount which is 
necessary to its proper equipment, the salability of 



142 MORTGAGE LOAN VALUES 

the farm is not so likely to be endangered during the 
life of an ordinary loan, except in those cases where 
the land is especially liable to overflows or erosions 
or the failure of irrigation systems or destruction of 
fences, nor is its salability likely to be affected by 
neighborhood changes, which may easily be the case 
with city property. 

Occasionally a section will be found where the 
"bear" element seems to prevail in Real Estate mat- 
ters, and its actual selling value is found to be below 
its ostensible value. "Whenever this situation exists 
it should be accepted by the investor at its full face 
value, for whether it is well grounded or not, nothing 
will tend more to depress prices than will pessimistic 
views on the part of those persons who might be buy- 
ers or from whom prospective buyers will get informa- 
tion. 

Nor, on the other hand, should optimistic views, 
which are much more common, ever be accepted at 
their face value, for it is probably true that no large 
number of loans, however poor, was ever made by any 
honest lender that was not warranted by the local 
ideas of conditions and prices at the time when they 
were made. 

All matters which may affect the stability of values 
should, therefore, be closely investigated in the inter- 
est of the investor, and this should be done, if possible, 
by some one whose experience covers a wider field 
than the local one, and who knows better what may 
happen, the measure of its probability, and the meas- 
ure of its damage to values if it does happen, than he 
who has only the local view to guide his judgment. 



XXIV 

ABSTRACTS OF THE RECORD TITLES 

The abstract of title to Real Estate purports to 
show, and should show, the exact condition of the 
record title to the property up to the date when it 
is last certified. It is a most important loan paper, 
for the title in the borrower and his right to alienate 
the property are essential in every loan transaction 
and must be fully and definitely determined. 

It sometimes happens that the record titles in a 
certain territory are not very generally satisfactory, 
but the reason for this is not so apt to be that the 
titles therein are bad as that there is insufficient evi- 
dence of good ones. 

In a section where such a condition exists as to all 
Real Estate it has usually been brought about by the 
destruction of the public records. Other causes, how- 
ever, such as the mistakes of incompetent convey- 
ancers, the omissions of careless recorders or the indif- 
ference or carelessness of former owners who have 
neglected to have their evidences of title recorded, 
have contributed to a bad condition of the records of a 
large proportion of the Real Estate holdings in many 
localities, and such errors are found most frequently 
perhaps in some of the older sections of the Southern 
States. 

"Whenever these conditions exist to any considerable 
143 



144 MORTGAGE LOAN VALUES 

extent it is a source of great annoyance and sometimes 
even of danger to the investor, because it creates a 
situation that must be met, as well as may be, by 
suits to quiet titles, statutes of limitation, or special 
legislative enactments, none of which is, under all cir- 
cumstances, satisfactory or coii3lusive, although in 
any territory they sometimes afford the only depend- 
ence of the title. 

There are few perfect titles, and all manner of 
faults may, of course, be found in the individual ones 
in any territory, especially in the older sections, but 
these can usually be cured, in a practical way at 
least, and marketable titles shown ; and it is only when 
defects in the records are found to be very common 
and very serious that the investor is justified in avoid- 
ing the territory for this reason. 

There is no other requirement of the mortgage loan 
business that is of more importance than that the 
abstract of the title record should be a true one, and 
yet it seems to be a very common practice among 
lenders and investors to accept at its face value any 
document which purports to be an abstract of the 
title to the property offered as security. They very 
properly rest upon the opinions of their attorneys 
but apparently fail to realise that the evil, if any 
exists, lies back of that and that all that such attor- 
neys can do and all that they ever attempt to do is 
to pass upon the title as shown by the abstract which 
has been furnished them for examination and to 
recommend an additional showing of facts if it should 
be incomplete ; their opinions never are and never can 



MORTGAGE LOAN VALUES 145 

i 

be flatly on the actual title nor on the truth of the 
abstract. 

Sometimes apparently complete abstracts are fur- 
nished and acted upon that are afterward found to 
be imperfect in some important respect, and for this 
reason it would seem to be a wise rule that none 
should be accepted without some evidence as to the 
equipment, reputation and responsibility of the ab- 
stractor who prepared it. 

It is very well known that in many sections of the 
country there are persons or firms to be found in 
almost every county seat who are regularly engaged 
in this business, persons who are equipped with copies 
of the public records, which they keep up to date, of 
every transaction recorded therein affecting the title 
to each piece of Real Estate located in the district in 
which they operate. 

It is possibly not so well known, however, that in 
many places where a considerable Real Estate and 
mortgage loan business is done there is no one who is 
regularly engaged in the business of abstracting the 
records, this work being attended to in each case 
as it comes up by some person, usually an attorney 
who is interested in the matter and to whom the work 
is an avocation instead of a vocation. 

The abstractor who makes a regular business of the 
work has an advantage over others in the opportunity 
that it affords him for a more intimate knowledge 
of the history of all of the land titles in his territory 
and many incidental matters which indirectly affect 
them ; and with such knowledge he is often better able 
than others to supply collateral evidence which will 



146 MORTGAGE LOAN VALUES 

serve to illuminate obscure places in record titles that 
might otherwise seem to be seriously defective. 

Under ordinary circumstances it is often found to 
be sufficient in "perfecting" record titles, that is, in 
making them good and marketable, that quit-claim 
deeds or disclaimers of rights or interests shall be 
executed by those persons in whom there may be 
rights or interests which would cloud the title in the 
applicant, or that affidavits shall be procured from 
such reputable persons as may have a probable knowl- 
edge of the facts when they are found to be necessary 
in order to establish such things as the dates of deaths 
or marriages or the identity of persons whose names 
appear differently in the records. 

These are, of course, matters for the investor's at- 
torney to pass upon, but the well equipped and com- 
petent abstractor can and does aid him in this work. 

When the record of a title is abstracted by a person 
who is not regularly engaged in the business, he may 
do the work as thoroughly and make as true and com- 
plete an abstract as any, and this is perhaps generally 
the case, but persons sometimes undertake the work 
who are incompetent, careless, and irresponsible, and 
the greater number of these will doubtless be found 
among those who are not regularly engaged in the 
business. 

The alleged abstracts made by such persons are 
often based upon indexes only; wills, deeds, mort- 
gages, releases, etc., being simply cited as such in the 
abstract, notwithstanding the fact that by the exact 
terms of these documents, the maker of the will may 
not have legally and unconditionally devised the prop- 



MORTGAGE LOAN VALUES 147 

erty in question to the person who is supposed to have 
inherited under it, nor the deed have conveyed an 
indefeasible title to it in fee simple to the grantee, 
nor the release have fully released it from all claims 
under the mortgage. 

It is true that the abstractor certifies the abstract 
and that in many instances he is a person of financial 
responsibility or that he is bonded (which is a require- 
ment of the law in certain States), but these safe- 
guards only cover the fact that the various records 
have been examined by him and nothing found therein 
that is not shown by the abstract, and neither his 
personal responsibility nor his bond may be adequate 
to cover losses that would be possible because of 
serious mistakes or oversights on his part. 

Although no ultimate loss may occur, carelessly 
made abstracts show many titles to be seriously de- 
fective when such is not really the case; on the other 
hand, they often fail to show existing incumbrances 
and title complications. 

In order to avoid "unnecessary" work such ab- 
stractors sometimes use "copies" of abstracts into 
which many errors may have found their way, and 
for the same reason they are careless in the matter of 
affidavits, for it is little trouble to procure these, and 
many which are wholly unreliable are used for the 
purpose of curing the defects which their "abstracts" 
may show. 

Occasionally a dishonest abstractor, having an inter- 
est in showing a good title, has been known to deliber- 
ately make such a showing despite the records by sup- 
plying the missing links in a broken chain of title by 



148 MORTGAGE LOAN VALUES 

pure invention, or by purposely omitting items which 
would show a state of facts other than the desired 
one. 

Two plans are used to overcome such record-title 
difficulties as are herein mentioned, but each is used 
in a very limited area ; one is the introduction of the 
Torrens system of title records, and the other is the 
establishment of Title Guarantee Companies. LTnder 
the first plan the title is guaranteed by the State or 
County after it has been tried by a constituted author- 
ity and adjudged to be good; under the second it is 
guaranteed by the title company after they have 
examined it and have decided that it is insurable. 
Each plan involves some expense to the property 
owner, but each seems to afford some protection to 
the lender provided that the liability is clearly de- 
fined, that the financial responsibility is ample and 
that relief is apt to be reasonably prompt if needed. 

TVhateyer advantage these plans may present, how- 
ever, their operation fails to extend to the greater part 
of the best loan territory, while the guaranty that is 
afforded the mortgagee by the work of fully com- 
petent and responsible abstractors and title attorneys 
can be had in almost any good territory and is in fact 
an exceedingly strong guaranty and one upon which 
he may rely with great confidence. 



XXV 

THE ACTUAL TITLE IN THE APPLICANT 

There is, however, another feature of the question 
of titles which must not be overlooked in this con- 
nection; it is the condition of the actual title in re- 
spect to those things which may affect the mortgagee's 
interests, for it should be noted that this condition 
may or may not be shown by the record title — for 
instance, the record does not, and cannot, show who 
is in personal possession of the property, but the fact 
of possession, if under color of title, may determine a 
better title than the one of record although that one 
may be complete. 

An easement may also become a definite right in 
persons who do not hold the fee, although it has never 
been made a matter of record ; or rights of recovery 
from the property may accrue under mechanics and 
material-men's lien laws, which claim, when filed of 
record, may take precedence over the rights of a 
lender, although his mortgage may have been executed 
before the actual filing of such lien, or a homestead 
right in the borrower that would prevent a recovery 
by the lender, may exist without being shown either 
of record or by any visible possession of the property, 
or transfers may have been made for the purpose of 
evading a law enacted for the protection of the wife's 
interest. 

149 



150 MORTGAGE LOAX VALUES 

Examples might be multiplied, but under a careful 
system of examination the danger of loss to the in- 
vestor is extremely small for the probable existence of 
such defects is nearly always indicated in some man- 
ner by the statements or by the absence of certain 
statements in either the application or the abstract 
and also in many cas:s are suggested by the surround- 
ing circumstances which come under the supervision 
of the inspector, who should be fully awake and 
watchful along these lines. 

For instance, if the application states that the prop- 
erty is occupied by a tenant and the occupant is 
found to be a person of the name given and appar- 
ently one of the tenant class, whose answers to ques- 
tions as to the terms of his tenancy go to support such 
statement, the danger of his having any claim to own- 
ership may be considered negligible, especially as it is 
a trait of human nature for him to claim everything to 
which he thinks he is entitled. 

On the other hand, if the occupant is evidently not 
of the tenant class, or if he is a near relative such as 
a son or daughter of the applicant, a more careful 
investigation should be made, and unless this is fully 
convincing, due caution will suggest that the occupant 
should be required to make a written disclaimer. 

Easements are not ordinarily of a very serious 
character from a loan point of view, but they may, of 
course, be such as to depreciate the value or salability 
of the property, and, if they exist, their terms should 
be known to the mortgagees. The signs of their prob- 
able existence and importance will be noted by the 
expert inspector, for they will usually be indicated by 



MORTGAGE LOAN VALUES 151 

paths, roadways, stairways, irrigation ditches, etc., 
used by persons other than the owners or occupants 
of the property, or they may be shown by the en- 
croachments of the fences or buildings of the adjoin- 
ing properties. 

The probability of the right to a lien against the 
property having accrued for labor or building ma- 
terial, is also usually shown upon the surface, the 
application should contain a statement covering this 
point, but notwithstanding any such statement, if the 
property has been very recently built or repaired, or 
if there is any evidence of work having been com- 
menced or material furnished for new buildings on 
the ground included in the application, the borrower 
should be required to exeeute a bond for the protection 
of the mortgagee. 

The homestead and exemption laws of the various 
States are not generally such as to demand more than 
the ordinary attention of the investor, but this rule is 
not universal, for in at least one instance, they are 
of very grave importance indeed, the rights under 
them being great and being based wholly upon the 
question of fact, which is made sus3eptible of proof 
in court, and if proved will be so held to be, although 
the borrower may have made contrary declarations 
under oath for the purpose of procuring the loan. It 
behooves the inspector then, in cas?s where this ques- 
tion is involved, to discover the facts, and he should 
examine, not only the property offered as security, 
but also the declared homestead, in order that he may 
know it to be clearly defined and actually the home 
stead of the applicant, and he should also make 



152 MORTGAGE LOAN VALUES 

judicious inquiries as to these matters of persons 
who have a probable knowledge of the facts, as the 
answers to such inquiries will often show whether or 
not there is any danger of an attempted evasion of 
this laAv. 

There is another matter which is of the same general 
class as the title complications referred to and which 
may be mentioned in this connection ; this is the ques- 
tion of identity, the identity of the property examined 
by the inspector with that described in the legal 
description in the application, and the identity of the 
person who executes the mortgage and receives the 
proceeds of the loan with the person who owns the 
property. 

This is so vital to any loan value, and the loss, if 
any is suffered, is so apt to be a serious one, that it 
would seem to be unlikely that any investor or lender 
would neglect to have the facts fully determined, but 
loss and trouble because of mistaken identity occur so 
infrequently that they seem never to be expected nor 
regarded as a present danger. 

There is, however, a great deal of carelessness in this 
respect on the part of both lenders and inspectors, 
who seem inclined to accept statements as to identity 
at their face value without verifying them, often ex- 
amining and passing upon the physical value of any 
property which is found to bear the proper street 
number, or which may be pointed out to them as the 
property offered in the application, and accepting as 
such, any person who may introduce himself or.be 
introduced under the name of the owner. 

This statement may appear to be rather an extreme 




153 



154 MORTGAGE LOAN VALUES 

one so far as the practice of a majority of lenders is 
concerned, but the fact that there is a great deal of 
carelessness in such matters is attested by the success 
of such mortgage loan swindlers as have used false 
descriptions and false personifications to accomplish 
their purposes; nearly all land and loan swindles 
being based upon insufficient investigations along this 
line, for this is believed to be and probably is the most 
vulnerable point in the armor of the intended vic- 
tims. 

Any of. the matters that may require a personal 
investigation in order to determine whether unfavor- 
able facts exist which are suggested but are not clearly 
shown will be open to one source of information which 
should not be overlooked. This may be called the 
"neighborhood knowledge." This is especially avail- 
able in country districts, where it usually reaches 
much further into details than does the same. kind of 
information obtained in city investigations, and while 
it may not always be dependable it should not be 
ignored, for it is almost sure to contain some kernels 
of fact and some suggestions as to the lines of inquiry 
which may be pursued with profit by the lender. 

This "neighborhood knowledge'' very often goes 
into the bona fides of the transaction; it may show 
that mis-statements may have been made, such for 
instance as that the proceeds of the loan are not likely 
to be used for the purpose stated in the application, 
or that the stated cash purchase price was, in fact, an 
exchange of overvalued properties, or it may develop 
certain adverse matters which have not been pre- 
viouslv considered, such as that of the notary having 



MORTGAGE LOAN VALUES 155 

an interest in the transaction that might invalidate it, 
or of the total cost to the borrower being an amount 
which would constitute usury under the laws of the 
State in which the loan is to be made, or that the loan 
has been rejected for cause by other investors. 

Any small bits of information along these or similar 
lines which serve to cast a doubt upon the safety or 
entire desirability of the loan will be notice to fully 
competent and expert attorneys and inspectors which 
they will not neglect to observe if they are well fitted 
for such employment, and the danger to the investor 
from such complications is thus reduced to a mini- 
mum. 



XXVI 

THE PERSONAL HAZARD OF THE BORROWER 

What has been spoken of in these comments as the 
personal hazard of a loan goes to the disposition and 
ability of the borrower to take proper care of his obli- 
gations and of the mortgaged property during the life 
of the loan, and to repay the principal when the loan 
matures. 

Some investors and lenders do not attach any great 
value to this hazard; they hold to the opinion that 
only the marketable value of the property and its title 
can be depended upon to make the loan a safe one. 
They also hold that changes of ownership are so fre- 
quent and so uncertain that a good personal hazard 
of today may be a poor one tomorrow, and, strictly 
speaking, in both of these contentions they are right. 

This view, however, omits the consideration of cer- 
tain practical and human features of the business and 
seems to be rather in line with the ancient idea, which 
is a wrong one but which still lodges in the minds of 
a few persons, that the interests of those who borrow 
and those who lend money are conflicting ones. Nor 
do these contentions, although technically right, dis- 
pose of the very practical fact that less trouble is 
actually experienced by the investor with the average 
loan that starts with a good personal hazard than with 
the average one which does not have that advantage. 

156 



MORTGAGE LOAN VALUES 157 

A more comprehensive view, perhaps, is one which 
recognizes the fact that the relations of the lender 
and borrower may be, and should be, both businesslike 
and friendly; that the terms of the contract should 
be observed and enforced, but that this rule is a gen- 
eral one, and that there may sometimes be occasions 
when its strict enforcement would work an unneces- 
sary hardship, and occasions when its liberal inter- 
pretation might encourage and enable an unfortunate 
borrower to meet his obligations, and thus prove to be 
the most satisfactory policy for both parties. 

This last view regards a good personal hazard as 
having a very distinct value — not exactly as being a 
necessary part of the security itself, but rather as 
being something which is added to it, and which will 
go to make an otherwise safe loan a more desirable 
one. In other words it is a promise, the lack of which 
may be taken as a warning of possible defaults in 
interest, taxes, and insurance, or of a neglect of the 
property itself which might result in a depreciation 
of its value. 

It also recognizes the fact that there is seldom or 
never any desire on the part of the lender to need- 
lessly distress the borrower, but that unfortunately 
there is a class of borrowers who are disposed to take 
advantage of this fact, and who will neglect their obli- 
gations to such an extent that many investors and 
lenders regard their connection as undesirable, 
although their business may appear to be safe. 

It is true that the actual value of the security must 
be ample and that the title must be a good one, but 
these things alone do not insure the specific perform- 



158 MORTGAGE LOAN VALUES 

ance of the contract and the avoidance of 'foreclosure; 
nor, for that matter, does a good personal hazard do 
this, but it does add something to the prospect of the 
loan's record proving to be a satisfactory one. 

At the outset a good personal hazard has a decided 
advantage, for, while transfers will be more frequent 
under some conditions and less so under others, it is 
estimated that, under the average conditions of Real 
Estate market activities, approximately eighty-five 
per cent of the ordinary classes of mortgaged proper- 
ties have no change of ownership during the life time 
of an ordinary five year loan ; this leaves only fifteen 
per cent in which there are such changes, and although 
there is no rule that either good or bad personal haz- 
ards in these cases will follow those which are of the 
same character, they undoubtedly do have a tendency 
in that direction, for the reason that men deal more 
often than otherwise with those persons who belong 
to the same class with which they themselves asso- 
ciate, and the property of one of these persons is more 
apt to be known to and to appeal to another of the 
same class, just as the well kept property of one who 
is thrifty is more likely to attract and create a desire 
for ownership in the mind of another thrifty person 
than it does in that of one who is himself careless and 
who is indifferent to its well kept condition. 

The condition in which the applicant keeps his 
property and the reputation he has achieved among 
those who know him and have dealt with him, for 
the payment of his obligations without resorting to 
unreasonable delays or contentions, may be accepted 
by the lender as strong evidence of the habits and 



MORTGAGE LOAN VALUES 159 

principles, which will probably dominate his future 
actions. 

Aside from the fact that good personal hazards are 
more apt to be found in those sections where good 
physical hazards are the rule, social distinctions or 
rules which apply to classes are of little value, for in 
considering this feature of the loan each case is neces- 
sarily an individual one, and the poor negro cotton 
farmer may be found to be a better personal risk than 
may the man of much greater wealth and standing 
who relies upon his position in life to excuse his lack 
of prompt performance ; or the same applicant may 
prove to be a better risk in a case where he has an 
interest in the property over and above his financial 
interest, even if his holdings are small, than in a case 
where he has no such additional interest in the prop- 
erty although its money value is much greater. 

For example, he who is the owner of rental property 
may be indifferent as to its upkeep and at a pinch 
may risk its sacrifice, but the property which is his 
and his family's home usually has for that reason an 
added value in his eyes which disposes him to make 
extra exertions, if necessary, to protect it. 

As to the question of the borrower's ability to take 
care of his obligations and to protect his interests, 
there are many facts which will serve to point with 
reasonable certainty to correct conclusions; for 
instance, if his chief dependence is upon his personal 
skill and ability, either physical or mental, these 
should not be found to fall below par as compared 
with the magnitude of his undertakings, and in such 
cases his age, equipment, industry and economy, his 



160 MORTGAGE LOAN VALUES 

success or failure in business matters and also any 
financial burdens which he may carry, such as expen- 
sive habits or the support of extravagant and non- 
producing dependents, should be taken into considera- 
tion. 

The applicant may, however, and often does, have 
resources ancl property holdings in addition to the 
property offered as security, and if these are substan- 
tial in character and sufficient in value above his 
indebtedness that fact may in some degree lessen the 
importance which might attach to a personal hazard 
which is without such material helps. But it should 
be remembered, when considering this feature, that 
character is a more dependable possession than wealth, 
and that the owner's property holdings may easily 
exceed his ability to manage them profitably. 

Careful inquiries and, when possible, personal 
observations should always be made to determine the 
personal risk that may go with each loan; and if 
direct knowledge is not obtainable and answers to 
inquiries only must be depended upon, it must be 
remembered that such answers should come from the 
best and most disinterested sources which may be 
available, and that conclusions should be drawn, if 
possible, from a concensus of opinions rather than 
from that of any individual, for neighborliness or 
other interest in the applicant's success in getting a 
loan often unduly colors such answers and opinions. 
The investigator should also be fully aware of the 
fact that he must not expect to get any answers that 
may be inimical to the interests of the applicant if 
the applicant or his agent is present at the time. 



MORTGAGE LOAN VALUES 161 

In the case of farm loans a direct knowledge of 
the facts is more available, and the inspector, in addi- 
tion to making judicious inquiries, always can and 
should report upon the personal hazard which is 
shown by the condition and care of the buildings, 
fences, implements, live stock, etc., and the general 
state of cultivation of the land itself, for from such 
observations very dependable conclusions may be 
drawn. 

All of these matters should be kept in mind, but 
among the various things that go to indicate the haz- 
ard, perhaps the most important one is the purpose 
for which the proceeds of the loan are to be used. 

A very common use for the money is as a part of 
the purchase price of the property offered as security, 
and in many cases this use is very favorable to the 
hazard; another very common use is the making of 
betterments to the property mortgaged, and this is 
also favorable if the loan asked for is upon the basis 
of the value of the property before the betterments 
are made. 

Other good uses for the proceeds of a loan may be 
the purchase of other real or personal property which 
will add an amount to the borrower's net income in 
excess of any interest he has to pay for the use of the 
money; or the money may be needed for the purpose 
of prosecuting or enlarging an already successful 
business, or for the refunding of other debts, when at 
the same time the borrower is reducing his total 
indebtedness. On the other hand, there are many 
purposes for which money is sought to be borrowed 
which should cause the lender and investor to hesitate, 



162 MOKTGAGE LOAN VALUES 

for they may either indicate a bad business manage- 
ment of the applicant's affairs in the past, or con- 
template investments which are more in the nature of 
new liabilities than of additional assets. 



XXVII 



IRRIGATED LAND 



Another matter to which special attention should 
be called is that of irrigation, for the business of lend- 
ing money upon the security of mortgages upon irri- 
gated lands is one which is seldom fully understood 
by those who have confined their operations to those 
sections in which the rainfall alone is depended upon 
to supply the agricultural needs. 

While no very comprehensive discussion of this 
subject is possible here, the mention of a few of the 
more important conditions which are peculiar to such 
lands and to land loans in cases where the value of 
the land depends largely upon its artificial irrigation, 
may give the uninformed person a clearer idea of the 
subject and a better knowledge of the lines along 
which investigations should be made when this class 
of securities is to be considered. As these matters are 
not always understood, the following facts are given 
as affording some basis for their study. 

Large sections of our country are either arid or 
semi-arid and, in others the rainfall, while sufficient 
in quantity, is not well distributed for agricultural 
purposes. In much of this territory, however, the 
land is so rich in all of the other necessary con- 
stituents for the production of crops that by the 

163 




IRRIGATION CANAL, 



164 



MORTGAGE LOAN VALUES 165 

addition of the needed amount of water it can be 
made to yield most abundantly. 

Experience has shown that one of the most impor- 
tant factors in the fertility of the soil is that of the 
proper content of water and that in many cases it is 
possible to control this excess or defect in moisture by 
drainage when it is excessive and by diverting water 
from streams or pumping it from beneath the surface 
onto the land when, it is lacking. 

The agricultural value of irrigation has long passed 
the experimental stage and while much may yet be 
learned as to the best methods of using it, the general 
benefit to be gained by its use when needed is no 
longer a matter of any doubt nor is there any question 
but that intelligently made loans upon irrigated lands 
are as satisfactory to the investor as any others. 

The fact is well recognized, however, by those who 
are experienced in this class of securities that their 
proper selection requires a fair general knowledge of 
the subject of irrigation insofar as it may affect such 
loans or the territory under consideration, for lend- 
ing upon these securities has certain peculiar fea- 
tures, and losses may easily result from the lender 
acting upon an insufficient knowledge of the subject. 

For instance, the land and water together may be 
ample security for the proposed loan, although the 
land alone may be wholly inadequate security, but 
mortgages are made upon the lands only and this in- 
troduces a complication, for while the title to these 
includes the buildings and other improvements 
thereon together with the irrigation ditches, etc., the 
title to the water, if it is from a flowing stream, is a 



166 MORTGAGE LOAN VALUES 

separate thing, and its use in connection with the land 
is subject to certain rules and conditions for "water 
flowing upon the surface of the earth is neither land 
nor tenement" and is not susceptible of absolute 
ownership and the mortgagor can only assign such 
rights as he may have in it as collateral security. 

But notwithstanding these facts, the availability of 
irrigation water to be had upon satisfactory and de- 
pendable conditions enhances the actual value of the 
land upon which it can be used with profit, just as 
the nearness of markets, good roads, and neighbor- 
hood development generally may add very materially 
to its value although the title to the land does not 
carry with it any enforcible claim of title in them. 

Flowing water is the property of the owners 
through or between whose land it flows, subject, how- 
ever, to the rights of other riparian proprietors above 
or below, although when separated from the body of 
which it constituted a part, it may be bought and sold 
like other commodities. 

The waters of a stream flowing through the public 
lands are a part of the public domain but after the 
general government has parted with the title to the 
soil the right to control the use of such waters passes 
to the State where they flow and various acts of Con- 
gress and the statutes of various States bear upon this 
subject, with the main object, it would seem, of the 
establishment and definition of what are known as 
priority rights. 

As this doctrine of prior rights grew out of the 
local rules and customs of miners and was based upon 
the wants of the community and the peculiar social 



MORTGAGE LOAN VALUES 167 

and industrial conditions locally prevailing to which 
the rules of the common law were at first considered 
inapplicable, the interpretation of the acts and 
statutes governing these matters have necessarily 
required many decisions from the courts in determin- 
ing the rights under the law of the claimants to the 
use of water. 

This question of the priority of the water right goes 
further, however, than simply to its legal status and 
extends to the amount of water available under any 
such right as may exist, compared with the amount 
needed for practical purposes by the irrigation system 
which it is expected to supply. 

The first right to the use of water may be a perma- 
nent one, held absolutely, or it may be subject to cer- 
tain conditions, restrictions, and reservations but in 
any case it takes precedence of all subsequent appro- 
priations, for these secondary rights must not inter- 
fere with the right of a prior taker to have the full 
benefit of his appropriation, and one who goes upon a 
stream and diverts the water from it is bound to take 
notice of all prior appropriations. 

It is not the intention, however, to go into a dis- 
cussion of the legal features of irrigation projects and 
mention has only been made of the above facts in 
order to show that the right to take and use water for 
this purpose involves legal questions which should not 
be carelessly passed upon but which should be sub- 
mitted to the judgment of a competent local attorney. 

Preliminary to even the most superficial knowledge 
of the subject of irrigation the investigator must, of 
course, understand the meaning of the terms which 



168 MORTGAGE LOAN VALUES 

are commonly used in discussing it, and at first he 
may be somewhat confused by the fact that different 
measurements are used to indicate the amount of 
water that is used or is available — these are min°r 7 s 
inches, second feet, and acre feet, and may be defined 
as follows : 

A Miner's Inch is the flow of water through a hole 
one inch square with a four inch head — it is measured 
by placing a board, in which there is a hole one inch 
square across a stream so that it will "backup" and 
maintain a depth of four inches of water above the 
hole. Neither the factor of time nor of amount of 
water enter into this measurement, for it was origi- 
nally designed solely for the use of miners who were 
only concerned with the size of the stream and the 
force of the flow. 

In applying the measure to the flow of water for 
irrigation purposes, however, the factor of time is 
introduced, and it has been found that the miner's 
inch flow per minute of reasonably clear water will 
be approximately nine gallons. 

A Second Foot is a cubic foot of water passing a 
given point in one second of time — it is equivalent to 
50 miner's inches and is calculated to give a result of 
450 gallons per minute; it is used in measuring the 
flow of larger streams as the miner's inch is used for 
the smaller ones. The second foot flow of a stream is 
usually measured from a weir or dam. 

An Acre Foot is 43,560 cubic feet or about 325,829 
gallons and is equivalent to a twelve inch rainfall over 
an acre of ground. In point of time the acre foot is 



MORTGAGE LOAN VALUES 169 

usually calculated as an annual distribution and cal- 
culated by weight will exceed 1,300 tons. 

One gallon contains 231 cubic inches, one cubic foot 
contains 1,728 cubic inches or 7.48 gallons, one acre 
contains 43,560 superficial feet or 6,272,640 square 
inches and the following calculations will show 
(theoretically) the results to be obtained in the dis- 
tribution according to its measurements of water on 
the land. 

One miner's inch in a 24 hour run over one acre is 
equal to .471 inches of rainfall, 2.1 miner's inches 
being equal to a one inch rainfall, and 25.2 miner's 
inches equal to twelve inches of rainfall. One miner's 
inch flowing continuously for one year will afford 
water sufficient to cover one acre of ground to a depth 
of 14.1 feet. One second foot or fifty miner's inches in 
a 24 hour run per acre would equal 23.89 inches of 
rainfall and one second foot in constant flow and 
evenly distributed over 160 acres would equal 54 
inches of rainfall, but these calculations are all 
theoretical and fail to take into account certain prac- 
tical facts which very materially reduce the amounts 
actually obtained at the points of contact with the 
roots of the plants for whose benefit it is intended. 

The reductions which must be made from the above 
estimates are due to many causes and often amount 
to as much as 50% of the measured flow. First, 
nearly all water taken from streams carries silt and 
other foreign substances which greatly retards its 
flow; second, the loss owing to evaporation is very 
great, especially in the hot and dry climates where 
irrigation is chiefly used; third, there is much loss 



170 MORTGAGE LOAN VALUES 

from seepage, especially in the use of earth conduits; 
fourth, there is waste from saturation at points of 
distribution. 

In many instances water is pumped from wells or 
underground supplies (unless flowing wells may be 
had) and sometimes from ponds, lakes or artificial 
reservoirs. This adds to the cost of irrigation the 
expense of using artificial power instead of gravity 
but it usually has the advantage of the supply having 
a greater head and being nearer to the point of dis- 
tribution and also of clearer water (it also avoids the 
danger from the seeds of noxious weeds which are apt 
to be carried by the open stream). 

A larger head and volume will overcome some of 
the losses above noted and 100 inches of water will be 
more effective on 100 acres than will 50 inches on 50 
acres. At the point of distribution onto the land a 
tight soil will absorb less water than will a loose soil 
and cement flumes or pipes are sometimes used for 
mains with metal or canvas pipes or hose to convey 
the water over the land. All of these things result in 
economy in the use of water and sometimes bring the 
efficiency of the water supply up to nearly its meas- 
urement capacity. 

The investigator should also have some knowledge 
of what is called the "duty of water." He should 
understand, however, that this term does not indicate 
that any given results can be expected from the appli- 
cation of a certain amount of water to a certain quan- 
tity of land, otherwise he may make the mistake of 
adopting arbitrary rules in this matter, for in prac- 
tice it will be found that the kind and texture of the 



MORTGAGE LOAN VALUES 171 

soil and sub-soil will affect the proportion of effi- 
ciency between equal supplies of water and also that 
the relative amounts needed for the various crops 
differ greatly, and that the amount which is found to 
be ample in some cases will fall far short of the neces- 
sary amount in other cases (where either the texture 
of the land or the crop to be irrigated is different) ; 
but the "duty of water" as it may be affected by 
existing conditions should be understood by him in 
order that he may be able to judge as to whether or 
not the supply is sufficient for general agricultural 
uses on the kind of land irrigated, or whether it is 
limited to the amount necessary for special purposes 
only. 



XXVIII 



DRAINAGE 



It is the intention of these comments to discuss 
briefly the more general matters and the more per- 
tinent questions which may arise from a consideration 
of the subject that is indicated by the sub-title. In 
this case the subject of drainage is of importance to 
mortgage loan values and gains interest because it is 
in many features the converse of the preceding com- 
ment on irrigation. 

A more comprehensive view of this can probably 
be had if the question is regarded as being more truly 
upon the subject of providing farm land with the 
proper content of water, whether the desirable con- 
tent is in excess or in deficiency of what it should be 
in order to insure a potentiality in crop producing 
that would not otherwise exist. This subject then 
may properly be considered as pertinent to either, or 
rather to both comments. 

Land which in its normal state may be arid or semi- 
arid and also be in a sense, unproductive of profit- 
able crops, may, under favorable conditions be re- 
deemed by irrigation. This matter has been touched 
upon in the preceding comment. An excessive oppo- 
site condition is often found in other considerable 
areas where drainage is required, and which for this 
reason may be as wholly unproductive of ordinary 

172 



MORTGAGE LOAN VALUES 173 

agricultural crops as are the arid and semi-arid lands, 
when without the aid of irrigation. 

In many parts of the country, then, large sections 
of land exist where the character of the surroundings 
and the low elevation are such as to hold for extended 
periods of time, the water which collects and impreg- 
nates the land that it covers. The total area of such 
land is estimated to be approximately 155,000 square 
miles, about one-third of wmich is only periodically 
overflowed. All of such lands, however, are generally 
classed as swamp lands and are often reclaimed by 
the building of gravity drainage canals or the dredg- 
ing of their natural outlets which were originally 
supplied by streams. The large excess of water usu- 
ally found in swamp or bog lands is generally caused 
by precipitation or by the supply which is collected 
there from streams or springs which have no suffi- 
cient outlet, or from the overflow of nearby swamps 
and from percolation from adjacent wet lands. 

The necessity for the drainage of any land whether 
by natural or by artificial means extends to the area 
covered by the limits of all agricultural lands and 
affects a vastly larger area than does swamp land 
drainage or its converse, irrigation. 

In this comment the consideration of this matter 
has dealt chiefly with the two extremes in water con- 
ditions and has kept in mind the larger areas which 
have been so affected. The total area of agricultural 
lands which, in their normal state, are either too wet 
or too dry for profitable farming although redeem- 
able, is much less than is the area of the lands where 



174 MORTGAGE LOAN VALUES 

a dependence is placed upon a sufficient average rain- 
fall. 

The average annual rainfall in any particular sec- 
tion is in a degree dependable for calculation, but to 
hope that it will be distributed in a desirable way is 
to hope for a great uncertainty. In almost every sec- 
tion and in almost every year there may be found dis- 
tricts and seasons, where the rainfall may have been 
undesirably heavy or undesirably light as measured 
by the requirements of the crops. The only relief 
from this condition seems to be by drainage and 
farmers in many of those sections where the threat 
of the season's uncertainty is not imminent, adopt 
the plan of open ditches. This plan often gives them 
some relief and recommends itself to many, for its 
original cost is so much less, although its upkeep is 
greater than tile drainage as it requires more frequent 
attention. 

The unqualified success, of any irrigation or drain- 
age plan rests upon the presence of sufficient crop 
producing elements, and upon the lack of any in- 
jurious elements such as the acids and alkalies. With 
an underground drainage, however, even these defects 
may be cured. 

The need of artificial drainage to supply the re- 
quirements of natural conditions extends to all parts 
of this important area and the character and amount 
of such drainage varies with the different conditions 
of elevation, climate, topography, rainfall, character 
of soil, sub-soil, etc. A discussion of drainage would 
be a useless undertaking were it made in the hope of 



MORTGAGE LOAN VALUES 175 

mentioning all the conditions that might arise even 
in a limited territory. 

It is almost universally known that the removal of 
the excess water from agricultural lands is desirable 
and that the fundamental requirements for its re- 
moval are both simple and easily understood. There- 
fore, no discussion of the subject seems profitable 
except to mention the fact that, while surface drain- 
age is sometimes the only drainage that is practical, 
it is never quite as satisfactory or effective as is the 
plan of underground drainage which can almost al- 
ways be used in supplying the local and lateral needs. 
This plan of underground drainage has many ad- 
vantages; it is more effective in collecting and car- 
rying the water, it does not interfere with the plow- 
ing and cultivating of the land, and its use also leaves 
the sub-soil in a more friable and, hence, more pro- 
ductive condition. 

This last change does not occur quickly but it is 
gradually accomplished by the water percolating 
through the ground to the tile and thus it often makes 
the higher land softer and better supplied with the 
necessary quantity of moisture than are the lower ly- 
ing and naturally wetter lands. 

A tendency to surface erosion can also be relieved 
and sometimes entirely overcome by supplying the 
land with sufficient underground drainage, as this 
w T ill relieve the surface from a heavy accumulation of 
water and provide for its passing, away below instead 
of upon the surface of the land. Lands that are 
eroded will always be injured and their loan value 
may be wholly destroyed by continued erosion. It is 



176 MORTGAGE LOAN VALUES 

therefore evident that no subject is of more impor- 
tance than is the one of proper drainage : — this is 
true whether it be the drainage of city property, or 
the drainage of agricultural sections. 

The application of some knowledge of this subject 
is also of use in considering mortgage loan values, for 
proper drainage is always conducive to better health 
and to better living conditions, for the occupants of 
either class of property as well as to greater produc- 
tiveness of the soil. 















*rz) J^tf^^*^gai!*ffi— ■ jjyl 






Ib ISKf /-^ 


Cf'/fc "* ' 




•flf* ,: 


' flipp 




The Public Domain 

The English System and 
Measures. 

Other Measurements. 

The Spanish-French Land 
Measures. 

Metric System Land Meas- 
ures, 

Spanish- Mexican Land 
Measures. 

Texas Land Measures. 


V 

Y 


I 


if. 


State and Congressional 

Surveys. 
Subdivisions. 
Fradtional and Irregular 

Divisions. 
Illustrations of Land 

Divisions. 

177 



XXIX 



THE PUBLIC DOMAIN 



The importance to the investor of accurate legal 
descriptions cannot be over-estimated, for the title to 
land carries with it the title to the buildings and all 
else which may belong to it ; and its legal description 
thus definitely fixes the location of the entire security. 

Although the physical value of the ground may only 
constitute a small part of the total value of the whole 
property, in every instance it is, in a sense, the most 
important part of the security offered. Each separ- 
ate parcel of land has, or should have, a legal descrip- 
tion which will clearly and positively identify it and 
set it apart from all other lands, and which, in con- 
nection with the general surveys, will show, at least 
approximately, its shape and area. This is usually 
the case, but in practice it is found that absolute 
accuracy in these matters is not always possible except 
by re-surveys and under certain circumstances is 
not possible even by this means. 

It is very important then that those persons who 
are concerned with the selection of Real Estate secu- 
rities should be fully able to understand land descrip- 
tions, although it is unfortunately true that to many 
persons such descriptions are practically meaningless, 
and that attorneys who profess to examine titles some- 
times take it for granted that the description recited 

178 



MORTGAGE LOAN VALUES 179 

in the abstract properly locates and describes the land 
intended to be conveyed or mortgaged, when a careful 
examination of the description might show it to be a 
seriously faulty one. 

Differences in land divisions, descriptions and 
measurements will be encountered in various sections 
of the country, differences that are largely due to 
the fact that various parts of what is now the United 
States were originally under the sovereignty of dif- 
ferent states and countries which were rather liberal 
in the matter of land grants and whose systems of 
land measurements and divisions were very dissimilar. 

When these titles go back to the original grants, the 
differences in them often prove to be somewhat con- 
fusing to those persons whose experience has been 
confined to the land descriptions in use in a different 
part of the country. If the investor's business is con- 
fined to a particular locality it is perhaps sufficient 
for his needs that his knowledge of land descriptions 
should also be confined to that locality. It is not 
intended, however, that these comments shall be 
limited to any single section of territory but that they 
shall be of use, if possible, to investors in any section, 
and an effort will be made to outline the principal 
facts, for unless such facts concerning any land under 
consideration are known and understood neither its 
area nor its location can be positively determined nor 
can its title be properly examined. A general knowl- 
edge of the public divisions of lands, of the surveys 
by which their location has been established, of the 
measurement by which their dimensions are known 
and also of the variations and exceptions to general 



180 MORTGAGE LOAN VALUES 

rules which are likely to be found in the territory 
under consideration, is always necessary to good work 
on the part of either the inspector or the title attor- 
ney ; and for this reason a brief outline of .the history 
of these matters, together with the tables which show 
the various measurements used, may perhaps afford 
the best foundation for a discussion of the subject. 

In an early day Florida was a Spanish possession ; 
England held dominion over the territory to the north 
of Florida as far west as the Mississippi River, north 
to the Ohio and then east of the Alleghanies to the 
French settlements on the St. Lawrence. France laid 
claim to Louisiana (except during the interval be- 
tween 1760 and 1800 when it was under the dominion 
of Spain). This was then a great fan-shaped terri- 
tory, broadening to the north and extending from the 
settlements at the mouth of the Mississippi and cov- 
ering about one and a quarter millions of square miles 
of the area now within the boundaries of the United 
States. At this time another vast territory in the 
southwest, covering nearly a million square miles, 
including Texas, belonging to Spain and afterwards 
to Mexico, while to the north of this and west of the 
Rocky Mountains yet another quarter of a million 
square miles, which was known as the Oregon terri- 
tory, was in dispute between Russia, France and 
England, and later between England and the United 
States. 

By the Revolutionary War the Colonies gained pos- 
session of the territory then held by England east of 
the -Mississippi River and south of the present bound- 
ary between Canada and the United States ; this also 



MORTGAGE LOAN VALUES 181 

included what was at that time called the "Territory 
Northwest of the Ohio" which England had pre- 
viously gained from France. 

The territorial lands thus gained by the Colonies 
from England were not at first held in common by 
them, but certain portions were claimed by the various 
Colonies by reason of the military services of their 
colonial troops, Virginia and New York each claim- 
ing the whole, and Massachusetts and Connecticut 
parts of the territory northwest of the Ohio ; Massa- 
chusetts laid claim to that territory which is now 
the State of Maine, Georgia to that lying to the west 
of it as far as the Mississippi River, South Carolina 
to a strip to the north of this, and New York and New 
Hampshire claimed what is now the State of Ver- 
mont. Tennessee was a part of the original State of 
North Carolina, and West Virginia and Kentucky 
were parts of the original State of Virginia. 

In the year 1803 the United States purchased the 
Louisiana territory from France ; in 1819 it purchased 
Florida from Spain ; in 1835 Texas achieved her inde- 
pendence from Mexico, and in 1845 was annexed to 
the United States; in 1846 England finally gave up 
her claims to the Oregon territory lying south of the 
49th degree of latitude (the present international 
boundary), and by the treaty of Guadalupe Hidalgo 
in 1848 and the Gadsden purchase in 1854, Mexico 
ceded to the United States the territory embraced 
within the present limits of California, Arizona, 
Nevada and Utah and parts of New Mexico, Colorado 
and Wyoming; and thus the present boundaries of 
the United States were formed. 



182 MORTGAGE LOAN VALUES 

Meanwhile, soon after the formation of our general 
government, the Colonies which came into the Union 
as landed proprietors had ceded their outside holdings 
(except about six thousand square miles claimed by 
Connecticut in what is now the northeastern part of 
Ohio and which has since been known as the Western 
Reserve) to the General Government, and in 1784 a 
system of Square Survey, which had been invented 
by Thomas Jefferson, was favorably reported to the 
Congress and was adopted and put into use but was 
not finally perfected until about the year 1820. 

This sj^stem has since been used in the public divis- 
ions of all of the lands belonging to the United States 
which had not been previously surveyed according to 
some other plan, But as it has always been the policy 
of governments to reward their soldiers by land 
grants and to encourage settlements in their domin- 
ions, especially at those places which for commercial 
or defensive reasons were regarded as important, and 
as lands were sold and assigned to many persons and 
in many places in pursuance of this policy, it has fol- 
lowed that such land ownerships not only cover the 
territory embraced in the original States but that 
they also exist in many other different and widely 
separated parts of the country, and the title to these 
lands having emanated from the then existing govern- 
ment under whose dominion they lay, they were 
marked out and described according to the systems of 
survey and measurement then in use by that govern- 
ment. The present system of government surveys has 
not been made to apply to these lands except as to 
some small portions and to Indian Grants where it 



MORTGAGE LOAN VALUES 183 

has sometimes been made to overlay the original sur- 
veys, but the Government recognizes and protects tha 
titles which have come through other sovereignties, 
although many of such lands are illy defined and 
bounded only by natural objects. These land divi- 
sions are very generally of irregular shapes and at 
best very little preference seems to have been given to 
the cardinal points of the compass in establishing their 
lines. Among the States, however, Georgia was an 
exception to this rule, for in portions of this State a 
system of square land divisions had been in use for 
about fifty years prior to the adoption by the general 
government of what we call the "Congressional Sur- 
vey," the entire State being finally covered by such 
State Surveys except in the territory lying to the east 
of the Oconee River where the lands were mostly 
deeded in regular shaped headrights and Military 
Grants. 

Texas may also be mentioned as an exception inas- 
much as immense tracts which had been granted to 
railroads and many large private claims were sur- 
veyed by the State in mile square sections, corre- 
sponding to that extent to the Government plan ; they 
were not based upon the township and range plan, 
however, and are described by number in blocks. 

The above historical outline is, of course, a very 
meager one, but it should be sufficient to indicate to 
the investigator the differences which may exist in 
different sections and the importance of a thorough 
examination into such matters in any territory with 
which he is not already familiar, for as pointed out in 
Warvelle on Abstracts: "Upon confirmation it is 



184 MORTGAGE LOAN VALUES 

necessary to have these titles traced out and fixed by 
survey or re-sttrvey, according to the peculiarities of 
the system of the government from which they orig- 
inated, and incidentally they must frequently be 
referred to in subsequent conveyances and subdi- 
visions. ' ' 



XXX 

THE ENGLISH SYSTEM AND MEASURES 

The linear measures which are in by far the most 
general use in the United States conform to the stand- 
ard established by the English government. In fact, 
this system is the one which has been used over ap- 
proximately nine-tenths of the total area of the coun- 
try, although Texas with its two hundred and sixty- 
five thousand square miles of territory and also many 
other comparatively small allotments and grants 
located at various places from the eastern coast of 
Florida to the western coast of California are meas- 
ured according to the Spanish-Mexican system, and 
many others scattered over the territory which was 
once under the dominion of France are measured ac- 
cording to the old French system. 

It is evident then that he who is charged with the 
investigation of lands or land titles may, if his terri- 
tory is extensive, be brought into contact Avith the 
peculiarities of systems other than that of England 
and the United States. 

An understanding of the system of measurements 
by which any lands have been surveyed or set apart 
is, of course, absolutely necessary as a basis for any 
intelligent idea of such divisions, and a ready famil- 
iarity with the measures of extension and land sur- 
faces in use in the territory where loans are to be 

185 



186 MORTGAGE LOAX VALUES 

considered is Therefore a matter of primary import- 
ance. 

In measuring lines and distances, surveyors use 
what is known as a Gunter's chain: this consists of a 
metal chain four rods or sixty-six feet in length, made 
up of one hundred links, each of which is seven and 
ninety-two hundredths inches in length. 

Superficial or square measures have naturally de- 
veloped from these measures of extension, and as they 
serve the purpose of defining the areas and contents 
of land without the necessity of making calculations 
to determine them, a knowledge of superficial meas- 
ures is of at least as much importance and is perhaps 
more frequently of seiwiee in land investigations than 
is the knowledge of the linear measurements upon 
which they are based. 

NOTE 

Although the fact may be of little or no practical 
use to the investigator of lands or land titles, it is 
nevertheless of interest to know that while measure- 
ments were anciently based upon such indefinite 
things as hand-breadths, spans and paces, they have 
since been very generally standardized upon what are 
believed to be definite and unchangeable facts. 

For instance, the French meter, which is the unit of 
the present French system and equals 39.37 English 
inches, is supposed to be one ten-millionth part of the 
distance from the equator to either pole, and the nauti- 
cal mile, which contains 6086.07 feet and equals 
1.152664: English miles, is based upon one minute of 
longitude at the equator. 

The English standard, which has been adopted by 
Parliament and is recognized bv law in the United 



MORTGAGE LOAN VALUES 187 

States, is based upon the length of a pendulum which 
will oscillate once in each exact second of time by 
reason or* the attraction of gravitation, which is con- 
stant. 

A brass pendulum at 62y 2 degrees temperature 
which will do this was found to measure 39.1393 
inches by the inch measurement then in use (which is 
said to have been anciently based upon the length of 
three barley-corns placed end to end) and this pendu- 
lum was adopted as the standard of measurements, 
twelve of these 39.1393 parts being declared to be one 
foot and thirty-six of them to be an imperial yard. 

In practice it is becoming more common to reduce 
all linear land measurements to feet and inches and 
all superficial land measures to square feet and inches 
in city lots and to acres and hundredths in rural prop- 
erty, by the following tables of English linear and 
square measures which are still in general use in de- 
fining distances and in computing the area and con- 
tents of land: 



188 



MORTGAGE LOAN VALUES 



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MORTGAGE LOAN VALUES 



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XXXI 

OTHER MEASUREMENTS 

SPANISH-FRENCH LAND MEASURES. 

(Facts and Tables taken from Warvelle on Abstracts). 

During the administration of the Spanish-French 
governors, in the province of Louisiana, the granting 
power of the royal domain was freely exercised, and 
the grants so made lie at the foundation of most of 
the early titles in the States subsequently formed 
from that province. 

The surveys of these grants are found in many 
places wrought in with our public surveys, present- 
ing, as it were, curious mosaic irregularities in strik- 
ing contrast with the simple rectangular system 
adopted by the national government. They illustrate, 
in a forcible manner, the peculiar agrarian systems of 
the governments which preceded us, in the diversified, 
irregular forms of grants, from urban in-lots, and 
out-lots, rural tracts of inconsiderable dimensions, and 
from thence increasing in extent to 7,056 arpents or a 
league square, the "arpent" of Paris being the stand- 
ard of provincial measurement. 

The following is a comparative statement adopted 
by the surveyor general's office at St. Louis, Mo., of 
the land measures of the United States, and the 
French measures formerly used in the province of 
Louisiana : 

191 



192 MORTGAGE LOAN VALUES 

OLD FRENCH LINEAR MEASURE 

French United States 

Chains. Links. 

1 perehe equals 0. 29.166 

10 perehe equals one arpent lineal or . 2. 91.666 

10 arpents " 29. 16.666 

100 " " 291. 66.666 

1000 " " 2916. 66.666 

The side of a league square equals 84 arpents equal 
245 chains. The side of a mile square equals 27 ar- 
pents equal 80 chains. 

1 perche^about 1 rd. 4.166 links or 19.25 ft. 
1 arpent=about 11 rd. 16.66 links or 192.5 ft. 



OLD FRENCH SUPERFICIAL MEASURE 

French United States 

Arpents. Acres. 

1 equivalent to 0.85 07 

2 1.70 14 

3 2.55 21 

4 3.40 28 

5 4.25 35 

6 5.10 42 

7 5.95 49 

8 6.80 56 

9 7.65 63 

10 8.50 69 

100 85.06 94 

1,000 850.69 44 

10,000 8,506.94 44 



MORTGAGE LOAN VALUES 193 

OLD FRENCH SUPERFICIAL MEASURE 

(Continued). 



Arpents. Perches. Acres. 

1 and 17.551 equal 1, 

2 35.102 2 


3 


52.653 


3 


4 


70.204 


4, 


5 


87.755 


5. 


7 


05.306 


6, 


8 


22.857 


7, 


9 


40.804 


8. 


10 


57.959 


9. 


11 

117 


75.510 

55.102 


10, 

100. 



1,175 51.020 1,000. 

11,755 10.204. . . . 10,000. 

A square league contains 7,056 arpents or 6,002.50 

acres. 
A square mile contains 725 arpents 32.64 perches 

or 640 A. 

THE METRIC SYSTEM OF LAND MEASURES. 

Consideration of the metric system (sometimes 
called the French system) is not strictly applicable 
to this discussion, for the reason that it was not in 
use prior to the time when the United States acquired 
sovereignty over the lands formerly owned by France, 
but tables of it are entered here for purposes of com- 
parison and for the reason that its use was legalized 
by act of Congress in 1866 and that it is actually in 



191 MORTGAGE LOAN VALUES 

use by tlie United States coast survey and will proba- 
bly be more extensively used for other purposes in 
the future than it is at present. 

The meter is supposed to be one ten-millionth part 
of the distance from the equator to either pole, 
measured on the earth's surface at sea level. It is 
about 39.37 inches and is the primary unit of length. 

The square meter is the unit of surface measures 
and is called a centicrre; it is about 10% square feet, 
or 1 1/5 square yards. 

The Are (Ar) is a square, each of whose sides is 
ten meters in length and is the unit of land measures. 

TABLE OF LINEAR MEASUREMENTS. 

10 millimeters=l centimeter=0.3937 inches. 

10 centimeters=l decimeter=3.937 inches. 

10 decimeters=l Meter^S ft. 3.37 inches. 

10 meters=l dekameter=32 ft. 7.7 in., or nearly 2 

rods. 
10 dekameters=l hectometer^328 ft. 1 in. or nearly 

20 rods. 
10 hectometers=l kilometer =0.62137 miles. 
10 kilometers=l myriameter=6.2137 miles. 

TABLE OF SQUARE SURFACE MEASURES 

100 square millinieters=l sq. centimeter=0.155 sq. 

inches. 
100 square centimeters=l sq. decimeter=15.5 sq. 

inches. 
100 square dechneters=l sq. meter or centiare. 



MORTGAGE LOAN VALUES 195 

1 centiare=1550 sq. in.=about IOV2 SC L- ft.= 
1.196 sq. yds. 
100 centiares=l are (ar) =119.6 sq. yds.=nearly 4 

sq. rds. 
100 ares=l heetare=2.471 acres. 

SPANISH-MEXICAN LAND MEASURES 

Scattered over this district (formerly belonging to 
Mexico) there exist many ancient Spanish-Mexican 
titles, municipal and rural, which, under the terms of 
the treaties, are recognized and protected by the gov 
eminent. These claims and grants were made for 
agriculture, mining, stock-raising, and colonization, 
and in all sizes from a village lot to a million-acre 
tract. 

The Surveyor General of California, in a report 
made in 1851, states that all grants in California, 
made either by the Spanish government, or that of 
Mexico, refer to the "vara" of Mexico as the measure 
of length, and that by common consent, in California, 
that measure is considered as exactly equivalent to 
thirty-three American inches. It would seem that 
another length is given to the ' ' vara ' ' by Mr. Alexan- 
der, who states its length to be equal to 92.741 per cent 
of the American yard (this being the approximate 
length of the Texan vara, or 33 1/3 inches). In prac- 
tice, however, the General Land Office has sanctioned 
the recognition, in California, of the Mexican vara as 
being equivalent to thirty-three American inches. 

The Mexican vara is the unit of all the measures of 
length, the pattern and size of which are taken from 



196 MORTGAGE LOAN VALUES 

the Castilian vara of the mark of Burgos, and is the 
legal vara used in the Mexican republic. Fifty Mexi- 
can varas make a measure which is called cordel, which 
instrument is used in measuring lands. 

The legal league contains 100 cordels, or 5,000 
varas, which is found by multiplying by 100 the 50 
varas contained in a cordel. The league is divided 
into two halves and four quarters, this being the only 
division made of it. Half a league contains 2,500 
varas, and a quarter of a league 1,250 varas. 
Anciently, the Mexican league was divided into three 
miles, the mile into a thousand paces of Solomon, and 
one of these paces into five-thirds of a Mexican vara, 
consequently the league had 3,000 paces of Solomon. 
This division is recognized in legal affairs, but has 
been a very long time in disuse — the same as the pace 
of Solomon, which in those days was called vara, and 
was used for measuring lands. The mark was equival- 
ent to two varas and seven-eighths — that is, eight 
marks containing twenty-three varas— and was used 
for measuring lands. 

It will be observed that the Texan vara is slightly 
longer than the standard recognized in California and 
adopted by the General Land Office. 

The following is a list of land measures adopted by 
the Mexican government (with free translation and 
approximate equivalents in hektares and acres) : 

1 caballeria=about 42.8 hektares or 107.94 acres. 
1 hektare=2.47 acres. 
Hacienda (plantation), 25,000 by 5,000 varas or 



MORTGAGE LOAN VALUES 197 

125,000,000 sq. vrs.=8778+ hektares=205.1 + 
caballerias=about 22,000 acres. 

Sitio de ganado mayor (or league) (cow ranch, pas- 
ture land), 5,000 by 5,000 varas or 25,000,000 sq. 
vrs.= 1,755. 61+ hektares=41+ caballerias= 
4,428.4+ acres. 

Sitio de ganado menor (sheep ranch), 3,333 1/3 by 
3,333 1/3 varas or 11,111,111 1/9 sq. vrs — 
780.27+ hekt-ares= 18.23+ caballerias=l,968+ 
acres. 

Criadero de ganado mayor (cattle breeding ranch), 
2,500 by 2.500 varas or 6,250,000 sq. vrs.=448 
hektares=10.25+ caballerias=l,107+ acres. 

Criadero de ganado menor (sheep breeding ranch), 
1,666 2/3 by 1,666 2/3 varas or 2,777,777 4/9 
sq. vrs.=199.13+ hektares=4.55+ caballerias= 
492+ acres. 

Labor (field, arable land), 1,000 by 1,000 varas or 
1,000,000 sq. vrs.=70.22+ hektares=1.64+ 
caballerias= 177% acres. 

Fundo legal para pueblo (legal town site), 1,200 bv 
1,200 varas or 1,440,000 sq. vrs.=101.12+ 
hektares=2.36+ caballerias=255+ a?res. 

Caballeria de tierra (knighthold of land), 1,104 by 
552 varas or' 609,408 sq. vrs.=43.7+ hektares= 
1 caballeria=107.94+ acres. 

Media caballeria (half a knighthold of land), 552 by 
552 varas or 304,704 sq. vrs.=21.8+ hektares= 
.5 caballerias=53.97+acres. 



198 MORTGAGE LOAN VALUES 

Cuarto caballeria or suerte cle tierra (quarter of a 
knightliold of land), 552 by 276 varas or 152,532 
sq. Yrs.=10.9-f- hektares=r.25 caballerias= 
26.98+ acres. 

Fanega sembradura cle maiz (sowing ground for one 
fanega of corn), 276 by 181 varas or 50,781 sq. 
vrs.=3.65-f hektares=.08 1/3 caballerias=9 

acres. 

Solar para casa, moulin o venta (site for house, mill, 
or inn). 50 by 50 varas or 2,500 tq. vrs.=.175561 

hektares=.001 eaballerias=.44 acres. 



MORTGAGE LOAN VALUES 



199 



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XXXII 

STATE AND CONGRESSIONAL SURVEYS 

The United States contains something more than 
three million square miles of territory ; roughly speak- 
ing, thirteen and one-half per cent of this consists of 
grants, donations, head-rights, and private claims 
derived from the sovereignty of England, or from the 
various States. These parcels of land are principally 
confined within the limits of the original States and 
are of little uniformity either in size or shape, and 
their boundaries are usually defined by natural ob- 
jects or by "neighborhood" descriptions. 

Ten per cent of the total area consists of lands, the 
divisions and legal descriptions of which are either 
wholly or in part those of the Spanish-French or 
Spanish-Mexican territory to which they originally 
belonged. These lands are found in many States and, 
as . previously stated, in widely separated localities, 
although by far the greater portion are in one body 
which covers the entire State of Texas. 

This State, which was formerly a part of Mexico, 
has adopted a plan of rectangular surveys for some 
of its western and northwestern territory. It has, 
however, retained the Spanish system of measurements 
by varas instead of adopting the English system which 
has been adopted by all of the other States and by 
the United States government. Under this plan the 

200 



MORTGAGE LOAN VALUES 201 

lands are divided into what are called sections and 
these are grouped into blocks. These sections con- 
tain 3,612,800 square varas each (640 acres) and are 
usually square in form, each side being 1900.8 varas 
(one mile) in length and lying square with the 
cardinal points of the compass. 

About one and one-half per cent of the total area 
of the United States is included in the State surveys 
of Georgia, which are regular in form although not 
uniform in size, and cover the entire State with the 
exception of the lands lying north of the Altamaha 
River and east of the Oconee River, which lands are 
included in the above mentioned thirteen and one- 
half per cent in which no regular State or Government 
surveys have been made. In this State soon after the 
year 1733 something near 220,000 acres were divided 
ink) regularly shaped tracts of 50 acres each and 
as this was the earliest regular division of land by 
public authority, the Georgia state surveys are en- 
titled to especial mention as probably having first 
called attention to the advantages of some such sys- 
tem and led eventually to the adoption of our present 
congressional survey. There are now five different 
plans of divisions by public survey in this State and 
in each of these sections the land is divided into dis- 
tricts which have designations by numbers as Land 
or Militia districts. Each of these districts is again 
divided into lots which are numbered with uniformity 
as to that district but with little uniformity as be- 
tween the different districts — that is to say, that the 
lots may be numbered from north to south in one dis- 
trict and from east to west in an adjoining district. 



202 MORTGAGE LOAN VALUES 

Across the north end of the State there are several 
counties comprising what was formerly known as. the 
Cherokee Strip where the survey has been made of 
lots lying square with the compass and measuring 160 
rods on each side; they contain 160 acres each; and 
in a few counties in this district (chiefly in Bartow 
County), where there were supposed to be gold de- 
posits, lands were surveyed into lots lying square with 
the compass and measuring 80 rods on each side ; they 
contain 40 acres each. 

Extending westward from the Oconee River to the 
Ocmulgee River and in some places to the Flint 
River the land has been surveyed into lots lying with 
their corners to the cardinal points of the compass 
and measuring 180 rods on each side; they contain 
202y 2 acres each. 




The southern portion of the State is surveyed into 
lots lying square with the compass and measuring 280 
rods on each side; they contain 490 acres each. 
Scale 1/16 in.=10 rds. 



MORTGAGE LOAN VALUES 



>03 



The remainder of the State has been surveyed into 
lots lying square with the compass and measuring 200 
rods on each side; they contain 250 acres each. 

350 RPS. 




Approximately seventy per cent of the entire area 
of the United States has been surveyed according to 
the government system of rectangular surveys, and 



200 RDS. 




5CAL€ '46 IH.» 10 Rt?S. 

an additional five per cent is embraced within the 
limits of the territory that is subject to this survey, 



204 MORTGAGE LOAN VALUES 

but which lies chiefly in the mountainous regions of 
the West and has not been surveyed. 

This government system of public land surveys, to 
which seventy-five per cent of the total area is sub- 
ject, contemplates square divisions of six miles on each 
side called townships, each of which contains as nearly 
as may be 23,040 acres. These townships are usually 
spoken of as " congressional townships ' ' to distinguish 
them from the Civil townships into which the counties 
of many of the States are divided for the purpose of 
local government, and are divided into 36 sections, 
each supposed to be one mile square and to contain 
640 acres. 

The Section is the unit of this system and, although 
its subdivision is contemplated, such subdivision by 
actual survey and monuments is not always required 
by law as a part of the government system. 

The framework of this system consists of base lines 
which are run on true parallels of latitude, and longi- 
tudinal lines which are called principal meridians. 
each of which is designated by a name or number. 
Parallel to the base lines (of which there are twenty- 
three) other lines are run which are called standard 
parallels and correction lines, and lines are also run 
parallel to the principal meridians (of which there 
are thirty). These are called guide meridians or 
auxiliary meridians. These lines are necessarily of 
more frequent occurrence in mountainous than in 
more level country, but always, of course, they form 
squares or parallelograms which are then surveyed 
into townships. These townships are designated by 
numbers north or south from the base line as "town- 



MORTGAGE LOAN VALUES 



205 



ships," and by numbers east or west from the eon- 
trolling meridian line as "ranges." 

The following diagram will show this system of 
numbering and identifying townships: 











ui 

ui 

o 
Z 
«r 
0! 


ui 


ul 


li 








■1 
or 

r 




111 

i 
5 


ai 
<f 

Z 


01 

z 
< 


3 
ul 

2 




















TY<P. 3.N. 


















TVYP. 2H 












Hi 






twp. IN. 




*A*S. 


LINE. 






?^ 
























TWP. 1.5. 


















TytP. 2. 5. 


















TW P. 3. S. 


















TWP. 


M.5. 








ar 
< 
5 
5 










1. 






i 












i 

z 
5 
%. 




SCALE »/ 


b IN.* & 


3CH. J 


f 
















> 





206 



MORTGAGE LOAN VALUES 



Any number of contiguous townships lying to the 
east or west of one another are given "township" 
numbers, and any number of contiguous townships 
lying to the north or south of one another are given 
"range" numbers — to illustrate, the shaded township 
marked "A" would be designated as Township One 
North, Range Two East, and the shaded township 
marked "B" would be designated as ToAvnship Two 
South, Range Three AVest. By this system any dupli- 
cation is impossible if the names or numbers of the 
controlling base and meridian lines are also given. 

The sections into which each congressional township 






5 


H 


3 


2 


1 


1 


% 


<? 


10 


/I 


IX 


\z 


17 


(6 


15 


m 


13 


l<? 


20 


ai 


22 


23 


24 


30 


49 


2$ 


21 


2b 


25 


31 


32 


33 


34 


35 


36 



3CAIC 'fc IN.* I M. 



MORTGAGE LOAN VALUES 



207 



is divided -are, with a few exceptions, numbered from 
one to thirty-six, commencing with the one in the 
northeast angle of the township and extending west 
and east alternately to section thirty-six in the south- 
There are numerous exceptions to this rule, how- 
ever, some of which are due to the impossibility of 
always making the rule conform to the conditions and 
others to the fact that some of the surveys were made 
before the system was perfected; an important 
example of the latter class of exceptions occurs in the 
territory east of the Great Miami River and west of 
east angle as shown by the foregoing diagram : 





36 


30 


2H 


1* 


12 


b 


N. 


55 


29 


2d 


17 


II 


5 


* » 














3H- 


n 


22 


16 


10 


H 
















33 


27 


21 


15 


9 


3 




32 


2b 


20 


M 


? 


2 




31 


15 


'<? 


13 


7 


1 



5CALt «/a IN. • LM. 



208 MORTGAGE LOAN VALUES 

the military grants and head-rights previously sur-^ 
veyed in what is now the State of Ohio ; in this district 
the townships are laid out and their locations desig- 
nated as controlled by certain base and meridian lines, 
but the sections are numbered as follows, beginning 
at the southeast corner of the township : 

A knowledge of such variations from the general 
rules which may prevail in the territory where his 
loans are to be made is of importance to the investor, 
for without it he may find himself at a loss when 
investigating lands or land titles; for example — Sec- 
tions 11, 21, and 31 are the only sections whose loca- 
tion in the township is the same under either of the 
above systems of numbering, while Section 36 is in 
the southeast angle in one case and in the northwest 
angle in the other, and a description of the southeast 
quarter of Section One and the northeast quarter of 
Section twelve in a given township in a district where 
the regular system of numbering had been used would 
show contiguous quarter sections, while the same sec- 
tional description in the district where this exception 
exists would show two separate quarter sections 
located six miles from one another. 

Another matter which may be mentioned in this con- 
nection, which is a rule however instead of an excep- 
tion, is that of ' ' School Lands ' ' ; since as early as the 
year 1785 it has been the fixed policy of the govern- 
ment to set apart certain lands for the support and 
encouragement of education, and it has been its prac- 
tice to select one or two sections in each township for 
this purpose (usually Section 16 in the States east of 
the Missouri River and Sections 16 and 36 in the 



MORTGAGE LOAN VALUES 209 

newer States lying west of these), and it has been 
made a part of the agreement of each State on its 
admission into the Union that the proceeds of these 
sections or other lands known as "lieu" lands shall 
be devoted to the support of the public schools. 



XXXI IT 



SUB-DIVISIONS 



Under our government system of public surveys 
certain subdivisions of sections are defined by law, 
but,' so far as the actual government survey is applied 
to subdivisions of quarter sections, they are desig- 
nated by imaginary lines only; the shape and area of 
these subdivisions (when regular) are shown by the 
following diagram : 



ti.XI. V4 

MO A. 


N-t.'/J 

HE.'/* 

HOA. 


N.E va 
I0A. 


3.YY '/^ 
40A. 


3.E.V4 

t<i.T1 */4 

MOA. 


5 '/a 

N.E Vu 

50A. 


3.Y/. »/4 
IbO A. 


5.EV4 
50A. 


EM 
90 A. 



5CALE 3 IN.« SOCIt 

210 



MORTGAGE LOAN VALUES 211 

It will be apparent that an3 T rectangular system of 
survey will lend itself readily to a similar system of 
subdivision and that if the original survey is a public 
one of record, the legal descriptions of the subdivi- 
sions of the various tracts of which it is composed will 
be simplified and each will indicate on its face the 
approximate shape and contents of the subdivision. 
The above plan of subdivision is therefore very gener- 
ally used in all such cases, whether the survey is a 
public or a private one. (In cases where the sides of 
the tracts do not conform to the cardinal points of the 
compass there is naturally a variation in the descrip- 
tion used from that of the one used in the govern- 
mental plan — for instance, the halves and quarters of 
the 202!/2 acre lots of central Georgia are described as 
the northwest one-half of the east quarter, etc., of the 
particular lot in which it is located.) 

There are, however, seldom any other public sub- 
divisions made of farming lands except those which 
are made of the mile square survey above shown. In 
cities and towns it is of course necessary that much 
smaller divisions of the lands should be made and 
these are known as "additions," "divisions," "sub- 
divisions," "blocks" and "lots," which are projected 
upon a ' ' plat ' ' and are identified by names and num- 
bers; the plats of these additions with their minute 
subdivisions when accepted and recorded under the 
laws of the State where they are located become a 
legal record, showing the identity of the property in 
question, its location, shape and dimensions, and the 
former description by section and township is then 



212 MORTGAGE LOAN VALUES 

seldom used except for the purpose of additional cer- 
tainty in locating the property. 

It is evident, therefore, that in city investigations 
the local official plat is of primary importance for, 
although there is usually a much greater regularity 
and uniformity of detail in the plat of a city or town 
which has been established subsequent to a more gen- 
eral public survey of the lands upon which it is 
located, than there is in that of one which had its be- 
ginnings along the windings of a water course or at 
a crossing of trails, there are in no case any general 
rules which are of much value in such investigations, 
for State laws and City ordinances govern these mat- 
ters and often leave much to the decision of the per- 
son who submits the plat of the proposed addition or 
subdivision. 

The use of official township or district plats is also 
often quite important in rural investigations, and this 
is the case even in those districts which have been 
surveyed according to some regular plan, for there 
are certain unavoidable conditions that necessarily 
result in numerous variations from the calculated 
results of any system. 

For instance, the contents of each of the several 
tracts which result from the subdivision of a "con- 
gressional" township is presumably of the acreage 
named on the above diagram, but natural obstacles, 
such as navigable lakes and rivers, are frequently en- 
countered in these surveys and this results in certain 
tracts failing to conform in size or shape to the regu- 
lar plan; such parts of the survey are known as 
"fractional" sections or quarter sections. The 



MORTGAGE LOAN VALUES 



213 



smaller of these tracts within the boundaries of a 
section are usually called "lots," but these and also 
those which have been formed by throwing together 
fragmentary parts of different sections are some- 
times called "plats." All of these are described as 
fractional parts and are numbered in a consecutive 
order, usually as nearly as may be in the order in 
which sections are numbered. 

The rule which is followed in such cases is illus- 
trated by the following diagram : 





i 






N. 5 


N»/> 






A, o 


• N.Yi. VH 








• 

SO A 


• 


N.t.'/I 




r^ lll ioT u 




160 A. 








CH • 


^'57 


7^Q A 




slr^ 








Ns^-^^^^^ L0T M 








i LOT 3 








X 

o 


• 

:at.83 A 


3M.I0A. 




ifeO A. 


5 


3 Vx 


« 


! 5.Vf. */H 

i 
i 

f aoA 







SCACt 3 IN, - SO CM. 

Such a tract of land is, of course, liable to changes 
by reason of accretions or reductions along its shore- 
line, but "meander lines" are generally run which 



214 MORTGAGE LOAN VALUES 

practically conform to the sinuosities of the shore and 
these enable the original contents of the tract to be 
calculated, although such surveys do not always serve 
to establish its boundaries (which may be the actual 
shore line) ; this estimate of its contents, however, 
should always be made a part of the description of 
the land; for example, a proper description of the 
northwest quarter of the above plat would be the N% 
of the NW/4-and Lots 1 and 2 of Fractional Section 

, Township , Range , containing in all 

116.46 acres, for without this last clause there would 
be no indication of its acreage except that it is a less 
or greater amount than 160 acres and there would be 
no way of determining the facts except by an examina- 
tion of the government plats or by a re-survey of the 
land. 

Another insurmountable obstacle to the uniform 
and regular division and subdivision of lands accord- 
ing to our system of government survey lies in the 
impossibility of fitting a square plat to a convex 
surface and this fact is also responsible for many of 
the fractional sections and quarter sections that are 
found in all square surveys of large areas. 

All initial lines are run by surveys to the north and 
south, and in the northern hemisphere any extensions 
of these lines necessarily converge toward the pole 
and diverge toward the equator; although the effect 
of this variation from an exact parallel is of slight 
importance in limited areas and especially in the 
minute subdivisions of cities and towns (for at the 
fortieth parallel it only amounts to about ten inches 
in the mile) when the survey is projected over a large 



MORTGAGE LOAN VALUES 215 

territory the fact becomes of considerable importance 
and therefore "correction" lines are run parallel to 
the base lines and usually at distances of 24 miles 
apart for the purpose of checking the growth of 
these inaccuracies before they have become too great 
and of making a new starting point for the one mile 
divisions between the north and south lines of the 
sections. 

Owing to this convergence the north line of each 
township will measure five feet less in length than 
its south line, but under the rules governing our con- 
gressional surveys each section is made to conform as 
nearly as may be to its proper shape and size, com- 
mencing with the southeast section, and the excesses 
or deficiencies are worked into the northern and 
western tiers of sections in the township and when 
possible into the northern or western subdivisions of 
these fractional sections, thus making Section 6 of 
each township the one most affected. 

As surveyor's lines are preferably run to the north 
they are less often extended for great distances to the 
south than to the north of a base line, and variations 
from the regulation size of townships which, are due 
to the convergence of lines are more often in the form 
of deficiencies than of excesses. Sometimes these de- 
fects are very considerable, but the contents of all 
fractional sections or lots are always stated in the 
original field notes. These fractions, when extended 
into the quarter sections, are usually called ' ' lots ' ' and 
are numbered from the northeasternmost one in the 
order shown in the following plat : 



216 



MORTGAGE LOAN VALUES 





LOT H 


LOT 3 


LOT a. 


LOT 1 




27 % A 


50 A. 


30A 


3oA. 


N. 


LOT 5 


S.E. '/•< 


5.YY- Vu 


3-E V*. 






iw. vq 


Itt'.fti 


ME V« 


< > 

1 


>0 A. 


* 0A - 5b 


I'/V*- 


UoA. 


LOT fe 


N.E.V4 








&Y*V4 


St. Vm 




30A- 


UOA. 


IfcO A 




LOT! 


5.E ft 






S.V/ Vu 






30 A. 


MO A. 





<• IS CH > 

SCALE 3 IN. * 30 Ctt. 

The above diagram is intended to show the ordinary 
subdivisions of the north and west tier of sections into 
which the excess or defect of the township, caused by 
the convergence of meridian lines, etc., has been run, 
but there are other causes for the existence of frac- 
tional sections and many will be found in other loca- 
tions in the townships, and these are apt to vary even 
more than the ones above mentioned both in size and 
angles. These fractions are made by the interference 
of State boundaries or other lines which have been 
established prior to the Congressional Survey or by 
the projection of a survey in one direction meeting 
the projection in an opposite direction of a survey 



MORTGAGE LOAN VALUES 



217 



made from a different initial line. 

In all such cases, however, the government survey 
and field notes should be referred to, for the terms by 
which any such "fractionals" are known reveal very 
little either as to their shape or the quantity of land 
which they may contain. 

The following diagram illustrates this feature by 
showing how the lines of the Congressional Survey 
meet the lots at the north point of the previously made 
grant by the government to George Rogers Clark at 
the ''Falls of the Ohio." 



34 



10 



2b 



^5 



2* 



3fe 



30 



31 



A* 



A* 



A N 



4* 



N. 




^^ 




TWP } N. 



TY1P JH 



& 



CLARK'S CHANT. 



SCALE 64 in.* | m 



XXXIV 

FRACTIONAL AND IRREGULAR DIVISIONS 

The congressional survey of our public domain, 
together with certain other surveys made by the 
authority of this government and that of other orig- 
inal owners, has covered the greater portion of the 
entire country with a network of established and 
recorded lines which form a dependable basis for the 
legal descriptions in all of the local subdivisions of 
land in that territory. 

The comments already made will perhaps give a 
fair general idea of these surveys, but there is also a 
considerable extent of territory, chiefly located in the 
older States, in which there has been no such system 
used and in which both public and private subdivi- 
sions have been very generally made in irregular 
shaped tracts, and some additional comment may 
serve to point out the difficulties which attend upon 
this lack of system and the resultant faults which fre- 
quently occur in the land descriptions in these sec- 
tions. 

During the time when a very large amount of the 
land in this section of the country was vacant, many 
grants were made which did not specify the particular 
location nor the shape of the tract granted, but only 
the number of acres and the general location of the 
same; it was, of course, natural for the grantee to 

218 



MORTGAGE LOAN VALUES 219 

select the best unappropriated land in such section 
and if the value of an irregular shaped tract or of a 
spring or water course or other thing was greater to 
him than was the value of a regular shape to his 
land, he would often extend his lines to include the 
desired location. 

At a later date when a considerable portion of the 
vacant land had been appropriated, more specific 
locations were named in the grants and they were fre- 
quently bounded in part by the lands of John Doe and 
Richard Roe and in part by vacant land. 

At a still later date the more desirable lands w T ere 
very generally taken up except that the lines of the 
various surveys often failed to include all of the land 
and the remaining unsold portion was generally of a 
very irregular shape owing to the fact that the sur- 
rounding lines of the tracts did not conform to one 
another. 

These matters are well illustrated by the following 
copies from the State official records which have been 
furnished by Major Loring Lee of Sumter, S. C. 

The first of these, which is a Lords Proprietors 
Grant, appears to be slightly defective both as to 
stated consideration and the date, but has been copied 
as found of record. 

Vol. 38 (Proprietor's Grants No. 1) page 175, 
Office of Secretary of State for State of South Caro- 
lina. 

"By virtue of the Power unto me given by the 
Right Honble the Lords Proprietors I hereby acknowl- 
edge to have sold unto John Seabrooke Four hundred 



220 MORTGAGE LOAN VALUES 

acres of land at the rate of Six per acre for which 
said land I have received the sum of Ten Pounds 
Curt money of Carolina reserving to be paid to the 
Lords Proprietors their heirs and assigns the sum of 
twelve pence out of each hundred acres as an acknowl- 
edgement or Chief rent on the 29th day of September 
yearly and every year the said John Seabrooke may 
make choice of the said Four hundred acres of land 
where the Lords rent is not yet paid nor no Grant 
passed for the same and where no person hath pos- 
sessed claimed or Inhabited the same. Always pro- 
vided that what rent or arrears of rent is due from 
the land or any part thereof is hereby reserved and 
must be paid to the Lords or their assigns by such 
person or persons that did formerly record possess or 
make use of the same or any Timber thereon. I say 
sold & received the purchase money aforesaid. Wit- 
ness my hand this thirtieth day of January 1695/6. 

John Archdale 
Registered this thirtieth day of January 1695/6 

Henry Wigington Dy Reg ' ' 

The second paper shows a Royal Grant by Geo. II 
to Christopher Singleton of a specific tract of land, 
a part of the adjoining lands being occupied and a 
part vacant. 

"SOUTH-CAROLINA. 

GEORGE the Second, by the Grace of God. of Great- 
Britain, France and Ireland, KING, Defender of the 
Faith, and fo forth, To All To Whom THESE PRES- 
ENTS Shall Come Greeting: KNOW YE, THAT 



MORTGAGE LOAN VALUES 221 

WE of our fpecial Grace, certain Knowledge and 
mere Motion, have given and granted, and by thefe 
Prefents, for us, our heirs and succeffors, DO GIVE 
AND GRANT unto 

Christopher Singleton his 

heirs and affigns, a plantation or tract of Three 
Hundred Acres of Land in Craven County at the 
high Hills of Wateree River bounded to the North 
West on Land laid out for Porche to the North East 
and North West on Land laid out for Matthew 
Singleton and on all other fides on Vacant Land 
And hath fuch fhape, form and marks, as appears by 
a plat thereof, hereunto annexed: Together with all- 
woods, underwoods, timber and timber-trees, lakes, 
ponds, fifhings, waters, water-courfes, profits, com- 
modities, appurtenances and hereditaments whatfo- 
ever, thereunto belonging or in anywif e appertaining : 
Together with privilege of hunting, hawking and fowl- 
ing in and upon the fame, and all mines and minerals 
whatfoever; faving and referving, neverthelefs to us, 
our heirs, and succeffors, all white pine-trees, if any 
there fhould be found growing thereon: And alfo 
faving and referving, to us, our heirs and succeffors, 
one tenth-part of mines of filver and gold only ■ TO 
HAVE AND TO HOLD, the faid tract of Three Hun- 
dred acres of land and all and fingular other the 
premifes hereby granted, with the apurtenances unto 
the faid 

Christopher Singleton his 

heirs and affigns for ever, in free and common foe- 
cage, he the faid Christopher Singleton his heirs or 
affigns yielding and paying therefore, unto us, our 
heirs and succeffors, or to our Receiver-General for 
the time being, or to his Deputy or Deputies for the 



222 MORTGAGE LOAN VALUES 

time being, yearly, that is to fay, on every twenty- 
fifth day of March, at the rate of three fhillings 
fterling, or four fhillings proclamation money, for 
every hundred acres, and fo in proportion according 
to the quantity of acres, contained herein ; the same 
to grow due and be accounted for from the date 
hereof. Provided, always, and this prefent Grant is 
upon conditions, nevertheless, that the faid 

Christopher Singleton his 

heirs and affigns fhall and do within three years next 
after the date of thefe prefents, clear and cultivate at 
the rate of three acres for every hundred acres of 
land, and fo in proportion according to the quantity 
of acres contained, or build a dwelling houfe thereon, 
and keep a ftock of five head of cattle for every five 
hundred acres, upon the fame, and in proportion for 
a greater or leffer quantity: And upon condition, 
that if the faid rent, hereby referved, fhall happen 
to be in arrear and unpaid for the f pace of three years 
from the time it became due, and no diftrefs can be 
found on the faid lands, tenements and hereditaments 
hereby granted, that then and in fuch cafe, the faid 
lands, tenements and hereditaments hereby granted, 
and every part and parcl thereof, fhall revert to us, 
our heirs and fucceffors, as fully and absolutely, as 
if the same had never been granted. Provided also, 
if the faid lands hereby mentioned to be granted, 
fhall happen to be within the bounds or limits of 
any of the townfhips, or of the lands referved for the 
life of the townships now laid out in our said Province, 
in purfuance of our Royal Instructions, that then this 
Grant shall be void, anything herein to the contrary 
contained notwithstanding. 

Given under the Great Seal of our faid Province. 
W ITNESS William Henry Lyttelton Esquire 
our Captain General 



3 



V ^ 3 ^3 



^3 



^ ^ 1 1 1 s 




^0 5 ft S jS 



^ ^ 1 1 



224 MORTGAGE LOAN VALUES 

Governor and Commander in chief in and over our 
faid Province of South-Carolina, this Eighth Day of 
May Anno Dom. 1758 in the Thirty Second Year of 
our Reign. 

William Henry (L. M. S.) Lyttelton 
Signed by his Excellency the Governor in Council 
xVnd hath hereunto a plat William Simpson C. C. 
thereof annexed, repre- 
fenting the fame, certified by 
Egerton Leigh Esqr 
Surveyor-General. ' ' 

The third paper is a copy of a grant to General 
Thomas Sumter by the State of South Carolina of a 
tract of land which had been previously completely 
surrounded by other claims, and serves to show the 
very irregular forms which resulted from this system 
of land division. 

"STATE OF SOUTH CAROLINA 

To all to whom thefe Prefents fhall come, Greeting : 
KNOW YE, That for and in confideration of Seventy 
two Pounds 6/8 d sterling money, paid by 

Thomas Sumter Esquire 
into the treafury for the ufe of this ftate, We have 
granted, and by thefe prefents do grant unto the faid 

Thomas Sumter his heirs and affigns, a plantation 
or tract of land, containing Three thousand One hun- 
dred acres Situate in the district of Camden, near 
the High Hills of Santee 

having fuch fhape, form and marks as are reprefented 
by a plat hereunto annexed, together with all woods, 
trees, waters, water courfes, profits, commodities, 



a^h^i-dcct^P- -4"^As A-^rn^ ■^hyi^v<€<j > -&-U&ZZM y h fo*LrJU.yy>Q, CU 




if 



2> t o&«- 



\fl^ \n\ r ?rr ? *p 



efa 



'K 



a^Ci^ 



<7*A~<l 






MORTGAGE LOAN VALUES 225 

appurtenances and hereditaments whatfoever there- 
unto belonging, TO HAVE AND TO HOLD the faid 
tract of three thousand one hundred acres of land, 
and all and fingular other the premifes hereby 
granted unto the faid Thomas Sumter his heirs and 
affigns, forever, in free and common focage. 

GIVEN UNDER THE GREAT SEAL OF THE 
STATE 

WITNESS his Excellency Thomas Pinckney 
Efquire, Governor and Commander in Chief in and 
over the faid State, at Charlefton, this fifth Day of 
March Anno Domini one thoufand feven hundred 
and Eighty Seven and in the Eleventh year of the 
Independence of the United "States of America. 

Thomas (L. M. S.) Pinckney 
And hath thereunto a Plat thereof annexed reprefent- 
ing the fame, certified by 

F. Bremar Pro 

Surveyor-General 
27th Decern 1786" 

Throughout all of this territory there are, of course, 
numerous monuments, the location of which are mat- 
ters of public record, and these, when they have been 
set by proper authority, are held in law to govern the 
distances and directions recited in the deed or other 
papers in which they are used as "calls." These 
monuments, however, have not been set with reference 
to any general plan or system but only according to 
the exigencies of the particular survey then being 



226 MORTGAGE LOAN VALUES 

made of certain tracts of land, and because many of 
these monuments were of an unsubstantial character 
it often becomes difficult in after years for a surveyor 
to find a definite starting point for his work. There 
were also many errors in the earlier surveys, for the 
reason that the obstacles and hindrances to good work 
and the difficulty of getting true measurements were 
greater before the forests were, cut or the swamp lands 
drained. 

In the time when the earlier divisions of the lands 
were made in these districts they were often regarded 
as being of comparatively little value, and errors in 
their survey which would now be thought serious 
were then regarded as unimportant and many "begin- 
nings" and "calls" were very indefinitely described, 
— for instance, the title to certain Indiana farm lands 
goes back to a description reading "beginning at a 
sycamore tree on the north bank of the Ohio River 
about one and one-half miles south of Six Mile 
Island"; and valuable property in the city of Dallas, 
Texas, is a part of a tract of land once transferred as 
"beginning at the northeast corner of my cabbage 
patch." This last example is perhaps rather an un- 
usual one but the first belongs to a class which is not 
at all uncommon, for in earlier times many divisions 
and transfers were made in the more unsettled dis- 
tricts of land which were never surveyed by any sur- 
veyor but Were described in deeds according to the 
rough measurements and estimated directions of lines 
which were supposed to enclose a certain quantity of 
land. Streams which have since changed their course 
were frequently made a part of the boundaries, and 



MORTGAGE LOAN VALUES 227 

sometimes the property was simply described as being 
surrounded by the lands of other (named) owners, 
which ownership has since greatly changed, and the 
deeds to which may in themselves be defective. 

In a majority of such cases, however, the universal 
recognition for many years of certain land marks and 
lines has probably served to establish their location 
with such certainty as to enable a competent surveyor 
to plat the land and measure its contents with suffi- 
cient accuracy for practical purposes, but in com- 
paratively few cases can either of these things be even 
approximated except by such a survey for the reason 
that directions and distances must always yield to 
monuments. 

"When these surveys are made they often reveal an 
overlapping of the lines given in the recorded descrip- 
tions and show differences from the stated acreage 
which have been unsuspected for years and which 
would probably never be discovered by the office 
work of platting the lands, which is quite a different 
matter from their actual survey in the field. 

To illustrate this fact, suppose certain property is 
described as being bounded by certain other tracts of 
Real Estate, each of which has been separately sur- 
veyed but at different times, and suppose that the 
description to which the office man has access gives all 
of the distances, directions and "calls" of these 
various surveys but fails to give the variation of the 
magnetic needle at the particular time and place when 
each survey was made (or the dates of such surveys, 
which to the surveyor is practically the same informa- 
tion), in such a case, and it is a very usual one, it is 



228 MORTGAGE LOAN VALUES 

only by going upon the ground and finding one or 
more of the monuments and making a survey from 
them that the missing information necessary to a cor- 
rect survey can be gained. 

To the uninformed this lacking information may 
seem to be a mere technical matter, but its very prac- 
tical nature will be understood when two of the funda- 
mental facts connected with the science of surveying 
are taken into account. The first of these is that 
within much less time than that in which lands have 
been surveyed in this country the magnetic needle has 
marked both extremes of its known variation, which 
is not uniform and is different at different places but 
which at the supposed location of this illustration 
(near the 2nd principal meridian and the Ohio River) 
amounts to about six and one-half degrees on each 
side of the true north, or a total variation of about 
thirteen degrees; and the second fact is that each 
variation of one degree amounts to a divergence of 
90 feet in each extension of one mile. 

The following diagram will show the relative loca- 
tion of two surveys made from the same initial point 
and according to the same statement of angles but at 
the times of the greatest variation of the needle and 
without reference to such variations, and incidentally 
it will show that great discrepancies in descriptions 
may come to exist from this cause, and that a descrip- 
tion which mathematically proves to itself to be cor- 
rect cannot always be taken as absolutely correct, for 
the reason that it may not physically fit the land 
intended to be described. 



MORTGAGE LOAN VALUES 



229 






mo 



FT. 



INITIAL POINT 



SCALE. 3 IM. » 50 CM. 



It is very evident then that when any undated 
survey is made a part of a land description it is open 
to the above objection and that when land is entirely 
described by the lines of the surrounding lands a 
"desk" examination is especially liable to error not 
only from this cause but also for the reason that the 
danger of mistakes having been made in measure- 
ments is greatly increased, and cases might be cited 
where a survey has demonstrated the fact that no 



230 MORTGAGE LOAN VALUES 

land actually existed to which the given description 
would apply even inferentially. 

The following description is a very fair example of 
a large class which will be found in this territory 
and is one that also shows the necessity of an actual 
survey of the land. The description may be found in 
the McLean County, Kentucky, records : 

"Beginning at a cottonwood and ash on Green 
River; thence North % of a degree West 349 poles; 
thence North 70 West 16 poles to Buck Creek ; thence 
down Buck Creek to Green River, and thence up the 
River to the beginning; excepting, however, there- 
from 50 acres sold to I. L. and W. G. Atchisson 
bounded as follows: Beginning at a sycamore on 
Green River, running North 11 East 172 poles ; thence 
North 49 West 4iy 2 poles to. a water beech on Buck 
Creek ; thence down Buck Creek to its mouth ; thence 
up Green River to the place of beginning." 

The only thing which may be definitely determined 
by a "desk" examination of this description is the 
fact that the lines along Buck Creek and Green River 
when taken together are at least equal in length to the 
hypothenuse of the angle shown by the surveyed lines 
and, except for the fact that the original tract was 
supposed to contain the "excepted" 50 acres, this does 
not warrant the conclusion that the contents are 
necessarily as much as would be included by the line 
of the hypothenuse. 



XXXV 



ILLUSTRATIONS OF LAND DIVISIONS 



The object of these comments on the division and 
measurement of land has not been either to mention 
or to discuss them fully (and this has not been at- 
tempted), but it has only been to make sufficient 
explanation of such general facts as may serve to 
emphasize the importance which attaches to a practi- 
cal knowledge of these matters on the part of the 
person who investigates Real Estate mortgage secu- 
rities, and the following illustrations have been added 
in order to show more clearly the differences which 
will be found in descriptions made under different 
systems of divisions and measures : 

The simplicity which is very common in those that 
are based upon a system of regular public survey is 
shown in the following two examples, one from the 
government and one from a State survey. 



ti.t. *M 
160 A. 






CIHUR Of 5CCT»OH '. 



SCALt •/* IN. • K> W>*. 

231 



232 MORTGAGE LOAN VALUES 

"The NE14 of Sec. 10, Twp. 6 N., 
E. 13 W. of Indian Meridian, Caddo County, 
Oklahoma. 160 acres." 




KALI Xk IN. « » RQft. 

"The SEi/ 2 of Lot #122 of the 
17th land district in Laurens County, 
Georgia. 101*4 acres." 

The more complicated nature of a description by 
metes and bounds of an irregular survey is shown 
by the following rather simple description and sur- 
veyor's certificate and map; although it is simple, 
this description has been somewhat lengthened by the 
meander lines along Duck Eiver and it will be noticed 
that in the description distances are named in terms 
of "poles" while the surveyor has calculated them in 
"chains." 

Description 

' ' Beginning in the Center of Duck River, the north- 
east corner of the Allison tract, two small sycamores 
on the East Bank; thence east to a stake between said 
sycamores and continuing in the same course on the 
line known as the Pratt-Holcomb division line 142.6 



MORTGAGE LOAN VALUES 233 

poles to a stake; thence north 3 degrees ?5 minutes 
east 45.5 poles to a stake; thence east 25 poles to a 
stake, the southwest corner of a 20 acre tract con- 
veyed by Arch Coldwell to his wife Tennie G. Cold- 
well; thence north 3 degrees east along the west line 
of said 20 acre tract, 92.4 poles to a stake on the 
north side of the road known as "The Sims' Ford 
Road," and crossing Duck River at the steel bridge; 
thence south 84% degrees west 15.9 poles to a black 
oak on the south side of said road; thence north 77 
degrees 10 minutes west 25.75 poles to a beech on the 
south side of said road; thence north 48 degrees west 
16 poles to a stake, beech pointers; north 11% degrees 
east 2 poles; thence west 16 poles to a low water 
mark, and continuing in all 22.1 poles to the center 
of DUck River; thence up the River with its center 
south 36% degrees west 7 poles; south 29 degrees 
west 12 poles; south 37 degrees west 16 poles; south 
32% degrees west 20 poles; south 18% degrees west 
4 poles; south 35 degrees west 8 poles; south 49 
degrees west 8 poles; south 55% degrees west 14.4 
poles ; south 60 degrees west 16 poles ; south 62 degrees 
west 16 poles; south 71% degrees west 12 poles; 
south 69 degrees west 12 poles ; south 41 degrees west 
16 poles; south 12% degrees west 12 poles; south 5% 
degrees west 8 poles; south 21% degrees west 12 
poles; south 6% degrees west 17.92 poles to the begin- 
ning in the center of the river west of a stake between 
two small sycamores on the bank, containing 112.91 
acres, more or less." 



234 



MORTGAGE LOAN VALUES 




Lw* Khovmn AS Pw»At-H«»coMb divniOH liw«. 



County of Bedford 
State of Tennessee 

The above is a plat of land sold by J. T. Allison to 
Arch Coldwell lying in the seventh civil district of 
Bedford Comity, Tennessee. Surveyed September 
1st., 1900. 

(Signed) J. L. Hutson, 

Survevor. 



MORTGAGE LOAN VALUES 235 

The following description from a deed (with a 
sketch of the land) will give an idea of the old French 
land divisions and measurements; it also illustrates 
the fact that water frontage was considered by the 
early settlers to be of greater importance than was a 
more convenient width of the tract of land, this tract 
being only one arpent or 192.5 feet in width and 
nearly sixty-eight arpents or more than thirteen thou- 
sand feet in length : 

"Vetalle Bouchez and 
wife, Marie Odelle 

to 
Amable Bouchez. 
Warranty Deed, $150.00, 
Dated August 5, 1823, 
Recorded September 5, 

1823, 
Book "C," Page 210, 
Knox Coimty Records. 
Conveys ; All that certain tract, tenement or parcel 
of land containing one (1) arpent, French measure, in 
front on the River Wabash and extending back the 
same width to the Cathlenette swamp, bounding on 
the eastward lands now or late of the heirs of 
Francois Languedoc and on the westward lands now 
or late of Louis and Charles Languedoc, situate in 
the Prairie de Grand Morais, below Vincennes, con- 
taining 67.63 arpents (57.53 acres)." 

In this particular case the French grant was over- 
laid by the Congressional Survey as is shown below by 
dotted lines, together with the field notes of the 
United States Government Surveyor, locating the 



236 MORTGAGE LOAN VALUES 

entire lot of which the above described arpent (shown 
in black) is the west half. 

CLAIM No. 43 

"Re-surveyed for Francois Languedoc 115.08 acres 
of land situated in Township 2 and 3 North, Range 11 
"West, Southwest of Vincennes in the Prairie : 

"Began at the corner of No. 42 on the bank of the 
River, thence South 51 West 6.47 down the River to 
a black oak 4 inches in diameter, the corner, thence 
South 14 East 197.71 to a post at the edge of the 
Prairie, thence North 35^ East 7.66 to the corner of 
No. 42, thence North 14 "West 197.08 to the place of 
beginning." 

Claim No. 44 

"Re-surveyed for Charles Languedoc 116.13 acres 
of land situated in the Prairie Southwest of Vin- 
cennes in Townships 2 and 3 North, Range 11 West : 

"Began at the corner of No. 43 on the bank of the 
River, thence down the same South 48^ West 6.58 
to a sycamore 10 inches in diameter, the corner, thence 
South 14 East 200.67 to post on the Cathlenette 
Pond in Township 2, Range 11, thence North 3014 
East 8.35 to the corner of No. 43, thence North 111 
West 197.71 to the place of beginning." 

Each of the above original tracts, containing 115.08 
and 116.13 acres, or approximately 135.28 and 136.51 
arpents, respectively, were only two arpents or 385 
feet in width and about two and one-half miles in 
length. 




SEC- 35 



T an. R. >> vy . 
T. 2N, <v uW. 



&>** ^ 






5K- 3fo. 



5£C. i 



SCftLE FRENCH '/i6iN.«l ARPEN|* 

U.S. SURVEY Vffc 1M ? U&tJfefrl 



5EC I 



CATHUN&TTE. 3WAMP 



237 



238 



MORTGAGE LOAN VALUES 



The following sketch is typical of Spanish-Mexican 
land divisions — it outlines the John Turner league 
and labor of land which is located on the Frio River 
in Live Oak County, Texas : 




MORTGAGE LOAN VALUES 239 

"Whenever possible these grants were located on 
streams with such water frontage as could be obtained 
and running back therefrom (usually between parallel 
lines) to contain the intended amount of land (as is 
shown in the above sketch by the line "A. A. "). 

In deeds made by tenants in common for the pur- 
pose of dividing the above land into two equal parts 
(as shown by the line "B.B."), the portion marked 
"C" is described in one deed simply as "the upper 
one-half of said John Turner League and Labor ' ' and 
in the other deed the portion marked "D" is more 
fully described as "the lower one-half of a League 
and Labor of land on the right bank of the Frio River 
in Live Oak County, Texas, originally granted to 
John Turner and known as Abstract No. 38." 

"The portion of said League and Labor hereby 
conveyed being the eastern or lower equal one-half of 
said League and Labor. The division line to lie run 
from the Frio River to the South or back line of said 
Turner tract cutting said League and Labor in two 
equal portions. ' ' 

To quote from a letter from Graham Dowdell of 
San Antonio, who examined the abstract of title to 
this land : ' ' This grant was made on July 15th, 1833 
by the Government of Mexico to a colonist, brought 
into Texas by one of the empresarios engaged in colon- 
izing before the Texas Revolution; in this particular 
case the entire grant was sold for $30.00 for the 
League of pasture land and twenty reales or $2.50 for 
the Labor or 177% acres of arable land. 

"In order to make the description in the first deed 
intelligible anyone examining the title would have to 



240 MORTGAGE LOAN VALUES 

know the meaning of the words ' ' upper ' ' and ' ' lower ' ' 
as affecting Mexican land grants; they have nothing 
to do with the direction indicated by the compass, nor 
do they indicate valley as distingnished from "up- 
land." They relate to the direction in which the 
stream flows on which the land abuts, consequently, 
when the "upper half" is conveyed it means the half 
of the grant lying up-stream. 

"In the early days these people, especially Mexi- 
cans or Spaniards, rarely left written wills when 
they died. It was equally rare for the heirs to resort 
to administration proceedings upon the estate of the 
deceased. Upon the death of the original grantee, 
the heirs usually made a parole partition of the grant, 
dividing it into equal portions each having an equal 
frontage on the river, base line width, running back 
between parallel lines to the back line of the grant 
and in one Spanish land grant on the Rio Grande this 
method of partition has resulted in one of the remote 
heirs of the original grantee owning a strip of land 
which is only twenty-five varas, or approximately 
seventy feet, in width fronting on the river and run- 
ning back between parallel lines for a distance of fif- 
teen miles. ' ' 

In the old times immense tracts of land were some- 
times granted by the Mexican Government to "em- 
presarios" who were engaged in colonizing that terri- 
tory which afterward became a part of the United 
States and the beginnings and lines of these grants 
were often somewhat indefinite. 

The record describing the boundaries of one of these 
grants made in 1826 (Burnet's Colony) is as follows: 



MORTGAGE LOAN VALUES 241 

"Beginning at the town of Nacogdoches; thence on 
a North course, the distance of fifteen leagues, to a 
point clear of the twenty boundary leagues parallel 
with the river Sabine, where a land mark shall be 
made; and thence on a line run west to Navasota 
Creek; thence down said creek with its meanderings, 
by its left bank, to the place where it is crossed by 
the road leading from Bexar to Nacogdoches ; thence 
with said road to fork of the Bull's Hill (Lomo del 
Toro) road, before arriving at the military post of the 
Trinity, with said road to its junction with the old 
road; and with said old road to the town of Nacog- 
doches and place of beginning." 



XXXVI 

CONCLUSION 

Various matters have been mentioned in the fore- 
going pages hut not very fully commented upon at the 
time, for the reason that this would have made neces- 
sary the introduction of certain collateral and even 
of seemingly extraneous matters at places where their 
consideration might have been more confusing than 
otherwise. 

Several of these matters are of a character that 
would, no doubt, warrant some additional comment 
and it is believed that they might be more clearly pre- 
sented and the relation that they bear to the main 
subject made more apparent by treating them in 
greater detail and as separate parts of the subject, 
but it is also believed that such mention of these mat- 
ters as has been made will serve the interests of those 
who are engaged in the business, and incidentally the 
general interests by inducing a closer study of the 
best practices and policies to be followed. 

To persons who are familiar with the business of 
making or buying mortgage loans, it may seem super- 
fluous to state that it is important for those who 
engage in it to be well equipped in knowledge and 
suited in temperament for the work; nevertheless it 
is true that many persons who are ill fitted in either 
or both respects, consider themselves capable and, 

242 



MORTGAGE LOAN VALUES 243 

entering the mortgage loan field, act with confidence, 
in matters wherein the more experienced lender or 
investor uses much greater caution. 

There is probably no other important line of busi- 
ness for which so many persons of limited experience 
therein consider themselves to be fitted; persons who 
for years, perhaps, have been absorbed in other af- 
fairs, become favorably impressed with the Real 
Estate mortgage business, and, believing the invest- 
ment of money in such securities to be a compara- 
tively simple matter, enter this field and undertake 
the work themselves, or employ other equally inexpe- 
rienced persons to do it for them. 

These are often persons who are, in a general way, 
well informed, and if they have made a few loans with 
which they have had a favorable experience — loans, 
for example, upon which the interest has been 
promptly paid, and the principal, when due, has been 
either paid or renewed, their confidence in their 
knowledge of the business is sustained, and they at- 
tribute their good fortune to their possession of a 
skillfulness which they are convinced will be suffi- 
cient to insure an equal measure of success with a 
large number of loans, with loans on various classes 
of property, and with loans in divers locations, when 
as a matter of fact they are often wholly ignorant of 
many of the conditions precedent to good lending as 
a business and of those rules which are of especial 
force and effect when the investor engages in exten- 
sive operations. 

In this, perhaps as much as in any other undertak- 
ing, it is tru i that ' ' a little knowledge is a dangerous 



244 MOKTGAGE LOAN VALUES 

thing, ' ' and if the lender or investor expects to reach 
safe conclusions in all of the various questions which 
will arise, it is important that he should know the 
laws of conservative lending, have all of the facts 
before him in each case and fully understand their 
relative values and applicability to the matter in 
hand. 

His temperament should be such that the task of 
assembling, investigating and judging the facts will 
be attractive rather than irksome to him; he should 
be able to see beneath the surface of favorable repre- 
sentations, and beyond the limit of present favorable 
conditions; he should be able to decide each case 
solely upon its own merits, uninfluenced by any out- 
side conditions, no matter how attractive they may 
be, and should know independently of the opinion of 
others, why in any given case certain loan values do, 
or do not, exist. 

It is not intended to say that if wholly favorable 
conditions clo not exist losses will be frequent, for if 
ordinary caution is used this is not apt to be the case, 
but in this business when losses do occur they are 
often serious ones, and only a careful observance of 
all safeguards (which should be intrusted to a skilled 
lender) should be depended upon, and this will make 
negligible any danger of loss that might otherwise 
exist and give an additional value to any loan or col- 
lection of loans. 

Unless the investor himself has a good working 
knowledge of the necessary requirements for good 
loans and good loan territory, he will be more or less 
at the mercy of borrowers or their agents, and these 



MORTGAGE LOAN VALUES 245 

persons are always interested parties who often have 
a very poor knowledge of what constitutes good mort- 
gage loan security and who are sometimes unscrupul- 
ous although they will be able in almost every instance 
to present good credentials and will frequently be 
fluent and, to the investor, convincing talkers. 

If unfitted for the work himself, he will be unable 
to pass upon the reports of his assistants with any 
degree of certainty as to the value of their work, and 
he will himself make many mistakes, the most com- 
mon of which perhaps will be that of magnifying the 
importance of some of the minor rules of the business 
and applying them in cases where, under the circum- 
stances, they are of no real force. At best he will 
be constantly in danger on the one hand of refusing 
meritorious offerings, and, on the other, of making a 
useless expenditure of time and money in further 
investigations of offerings which, if more expert, he 
would have condemned on the showing of preliminary 
reports. 

Such a person may succeed in avoiding the serious 
mistakes that will result in an ultimate loss of capital 
but if he is in charge of trust funds and is con- 
scientiously endeavoring to obtain only high class se- 
curities, the work will soon prove to be a burden 
which will increase as his realization of his own limita- 
tions increases. 

For various reasons many poor loans are paid; 
sometimes this is because of the borrower's belief, or 
even because of his hope, that an equity which is 
worth protecting remains in the property; sometimes 
the loan is protected by the personal responsibility 



246 



MORTGAGE LOAN VALUES 




MORTGAGE LOAN VALUES 247 

of the borrower outside of his interest in the property 
mortgaged, and it also very often happens that a loan 
is bettered because there is an appreciation in the 
value of the security after the loan is made. 

Of course it would be very poor business sense for 
the mortgagee to depend upon any such help to make 
his security good, but it is true that such help often 
does come to his aid, and therefore losses are seldom 
so frequent as would seem to be unavoidable to one 
who contemplates the unseen dangers which lie in the 
path of the inexperienced investor, and it may be 
added here, that this fact argues very strongly indeed 
in favor of the entirely dependable character of such 
Real Estate mortgages as have been selectd or made 
by persons who are fully competent to do so. 

In concluding these comments it may not be super- 
fluous to say that while there is no reason to suppose 
that the desirability of city loans will be greatly dif- 
ferent in the future from what it has been in the past, 
the investor in farm loans may congratulate himself 
upon the fact that as a class such securities are grow- 
ing better — not greatly perhaps in many sections, not 
rapidly perhaps in every section, but growing steadily 
and generally better — a condition that has been 
brought about by a wide-spread and intelligent effort 
to make improvements in farming methods, in live 
stock and farm equipment, in better drainage and bet- 
ter roads and in everything else that goes to make 
farm life more pleasant and the business of farming 
more profitable; and this effort is being materially 
aided and encouraged by a vast number of organiza- 



248 MORTGAGE LOAN VALUES 

tions for that purpose, from the Agricultural Depart- 
ment of the United States to the local corn clubs of 
the boys, but chiefly by the fact that the farmers 
themselves have very generally awakened to their 
opportunities and to the value of improvements along 
these lines; and the borrower on farm securities in 
sections where high interest rates prevail may congrat- 
ulate himself upon the fact that with a betterment of 
general conditions in his section he may look forward 
with confidence to a betterment to him of rates and 
terms. 

With a fuller knowledge of the subject he realizes 
that it has been the conditions surrounding his secu- 
rity and not the conspiracy of money lenders (for 
there has been none) that have "held him up"; he 
realizes that if one section enjoys better rates and 
terms than another it is because of good and suffi- 
cient and material reasons and he has more faith in 
the efficacy of common sense improvements to bettter 
his condition and less in such methods as the destruc- 
tion of surplus crops, in organized efforts to arbitrar- 
ily govern production and prices, or in the passage of 
laws intended to limit and control the operation of 
more powerful laws. The investor in farm loans may 
also congratulate himself upon the fact that in no 
other line of investment is the prospect of the future 
demand for money so promising. Enormous areas are 
as yet agriculturally undeveloped except in the most 
elementary way, in very few places indeed has any 
approach to full development been made and in no 
other field is the demand for development more insist- 
ent or better grounded. 



